“Gold gets dug out of the ground in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. Anyone watching from Mars would be scratching their head.” — Warren Buffet (ProQuest eBook)
India is a farmer’s land engaged in agricultural activities for sustenance and livelihood, contributing to the country’s economy. Therefore, it is well-known that agriculture remains the significant backbone of India’s economy. To perform agricultural activities, farmers face several challenges concerning capital accumulation to meet their farming needs, for necessary equipment, loads and trucks, or to aid any unforeseeable expenses. Therefore, the farmers (to curb these challenges) rely on loans as one of their primary sources of financial solution.
It was noted that the Government of India, in the years 2003-2004 – Biradar Jivan, 2019 , initiated the doubling of the agricultural credit programme to boost Indian farmers’ short- or long-term agrarian credit in the country. However, it could not achieve its entire goal due to the imbalance across the country.
The southern states’ farmers were more inclined towards Agricultural Gold Loans (hereinafter AGL). AGL is a method of acquiring loans where the farmers produce their gold in the forms of jewellery, coins, etc., as collateral in return for a loan secured with the quantitative value of the gold. This method of gold loans has become a viable alternative as it offers quick and accessible financing options. This essay deals with the historical background, contemporary issues, and business and legal perspectives of agricultural gold loans.
History and Backbone of Agricultural Gold Loan
After the Zamindari Abolition Acts post-1950s and 1960s, the farming lands and their feudal system’s reign ended with the emergence of small farming activities wherein ownership of the farming land stayed with the farmers tilting and producing from such land. This small-scale farming thus paved the route for industrial revolution and technological advancement.
This enhancement follows the same pathway as the European and American revolutions from the feudal farming system. These regions also saw technological changes and industrialization after the fragmentation of land held by Churches and landlords. Thus, small-scale farming in India has also created a market for credit and borrowings.
The gold loan market in India has developed in the past two decades. Previously an unregulated credit system, it saw changes due to the advent of Non-Banking Financial Corporations (NBFCs) and banks. The Reserve Bank of India recognized the need for regulation, transparency, and governance and hence mandated Know Your Customer (KYC) norms. Risk weight assessment and transaction monitoring were also made mandatory to prevent irregular practices in gold loans. — RBI Master Circular
Contemporary Position of Agricultural Gold Loan
Agricultural gold loans have gained popularity due to their dynamic scope; they provide crucial financial aid to farmers. Recently, the RBI decided to increase the loan quantum for Regional Rural Banks (RRBs) from ₹1 lakh to ₹2 lakh under a bullet repayment scheme, subject to maintaining a Loan to Value (LTV) ratio of 75%. (RBI Notification)
Gold loans are typically considered secure credit, with fluctuating gold rates, hence the lower LTV ratio compared to other loans. RBI’s working group study indicated that Southern India accounted for 40% of the annual gold demand, followed by West (25%), North (20-25%), and East (10-15%).
On July 26, 2012, the Indian government advised public sector banks to moderately implement agricultural gold credit schemes. (NABARD Report)
NBFCs have expanded into rural markets by offering agricultural gold loans at lower interest rates. (Business Today Article). This growth makes fund accumulation quicker and repayment easier for farmers due to valuable collateral and flexible tenures.
AGLs have supported farmers and agri-businesses in expanding land, acquiring farming assets, and diversifying into new areas. The process of availing AGL has become simple and efficient—submit gold and documents, and receive disbursal. However, it is crucial to understand the scheme terms, match collateral value to loan amount, and assess the interest rate. (IIM Ahmedabad Study)
Legal Position and Waiver Schemes
Government loan waiver schemes have been scrutinized and validated by courts. One case before the Hon’ble Bombay High Court involved the interpretation of “short-term loan” in a government waiver list. The court allowed a gold-backed agricultural loan to be included under the scheme. (Bombay High Court Case)
A Critical View Point
In Kerala, the AGL stands its highest percentage in comparison to all other states, the primary reason was that the borrowers were well awarded of the KCC. Around 76% of AGL borrowers were well awarded of interest rate rebate available for gold loan borrowers. There are subsidies available for AGL borrowers and its misuse and such as diversion to non-agricultural activities and weak repayment and recovery of loan is seen.
It has been critically claimed that the AGL has in hostile manner disrupted the institutional credit system such as Crop Loans, etc. The AGL lacks the legal regulation and is still deeply rooted in the unorganized sector only, thus a robust system still is in requirement and in need. AGL still is dependent upon cropping patterns and farming scale as well as size of holdings. The lack of uniformity and standardization can lead to problems in deep penetrative sense.
These are problems that both NABARD and RBI have expressed timely and held to be the contemporary issues related to the Agricultural Gold Loans. Read NABARD Report
Way Forward
While AGLs, as an emerging method, stand as a crucial financial credit tool for India’s agrarian economy, there is a need for a comprehensive regulatory framework by the RBI and the Government to create appropriate schemes, guidelines and uniform regulations concerning transparent pricing and interest rates for AGLs to retardant the misuse of loans which are getting used for non-agricultural purposes. Therefore, random audits, and stricter check and balance must be incorporated to improve financial stability.
There is also a lacuna which is a statutory urgency to be addressed, that is provisional safeguards for borrowers of AGL. There is a relationship that arises between the lender and borrower that should be regulated by the contract or agreement to avoid illegal or unfair use of collateral gold and other factors connected therewith.
There must also be some digital or online platform where such data about the AGL is issued and on record; it should also issue gazette information so that borrowers are informed at all times. Therefore, AGLs have significantly reduced the credit gap for farmers; their long-term viability will rely on finding the ideal mix between regulatory rigor, borrower protection, and convenience of access. All future improvements must be based on a financially sound and farmer-friendly model.
Apart from this, the advent of AGL has developed a smooth functioning of the agricultural economy, has also helped in ducking credit flow in the economy. Agrarian economy tends to fluctuate and gold being of such value to Indians becomes a means for acquiring credit in a very easy and unhasty manner. This therefore again helps boost the economy in general. Therefore, in all sense AGL is an important facet of the functioning of the market and supply chain of produce.
