Chennai, May 28 (PTI) Tamil Nadu Chief Minister M K Stalin on Wednesday urged the Union government to advise the RBI to reconsider proposed restrictions under the directions for lending against gold collateral as it is likely to cause serious disruptions to the rural credit delivery system in the state.

Writing to Union Finance Minister Nirmala Sitharaman, Stalin said it is imperative that gold continued to be accepted as collateral for agricultural and allied loans up to Rs 2 lakh, in recognition of its practical utility and the prevailing rural credit realities.

"I write to express the Government of Tamil Nadu’s grave concern regarding the draft directions issued by the Reserve Bank of India on lending against gold collateral, which seek to prohibit banks from accepting gold as security for agricultural loans up to Rs 2 lakh," he said.

The chief minister further said that this proposal is likely to result in serious disruptions to the rural credit delivery system in Tamil Nadu and across many parts of south India, where gold-backed loans serve as a primary source of timely, short-term agricultural credit, especially for small and marginal farmers, tenant cultivators, and those engaged in allied sectors such as dairy, poultry, and fisheries.

Small and marginal farmers often lack formal land titles or verifiable income documentation. For such households, pledging household gold has been a viable and dignified route to access institutional credit. The proposed prohibition would directly curtail this essential channel, effectively excluding a large segment of genuine and needy borrowers from the formal financial system.

With formal avenues constrained, rural borrowers may be compelled to turn to informal and unregulated moneylenders who typically charge exorbitant interest rates. This would expose them to exploitative practices, deepen indebtedness, and erode the progress made in formal financial inclusion.

The new requirement for documented assessment of repayment capacity, particularly for small-ticket agricultural loans, is likely to be impractical in the rural context. It may create procedural hurdles, lead to misclassification of credit, attract audit objections, and increase compliance burdens on both banks and borrowers.

Gold-backed loans provide a swift and flexible mechanism for meeting seasonal agricultural expenses. Any restriction on this channel could delay or reduce credit flow during critical periods such as sowing and harvesting, thereby affecting farm operations, productivity, and rural economic cycles.

A significant share of PSL (Priority Sector Lending) credit to the agriculture sector is currently extended through gold loans. Curtailing this mechanism would impair the ability of banks to meet their PSL targets and could lead to a slowdown in overall rural credit expansion.

Considering such factors, Stalin urged the Central Minister to advise the RBI to reconsider the proposed restriction in the Reserve Bank of India (Lending against Gold collateral) Directions, 2025. "It is imperative that gold continue to be accepted as collateral for agricultural and allied loans up to Rs 2 lakh, in recognition of its practical utility and the prevailing rural credit realities. I strongly suggest that a balanced regulatory approach, one that upholds credit discipline while preserving financial access for the vulnerable, would be more appropriate and equitable," the chief minister requested. PTI VGN VGN KH

Restrictions on gold-secured lending risk disrupting rural credit and push borrowers toward informal lenders with adverse inclusion consequences. The proposed directions would prohibit banks from accepting gold as collateral for small-ticket agricultural and allied loans, potentially excluding many small and marginal farmers who lack formal documentation and rely on swift gold-backed credit. This could divert borrowers to informal moneylenders, raise compliance and classification difficulties for banks, and impair the ability to meet Priority Sector Lending obligations. A balanced regulatory approach is urged to preserve rural access while upholding credit discipline.