Budget 2026: Key Recommendations for FM Sitharaman to Support Gold Loan NBFCs

Union Budget 2026 is poised to play a pivotal role in India’s economic trajectory, offering a unique opportunity to enhance financial inclusion and stimulate credit-led growth. With a backdrop of political stability and robust domestic demand, the government is encouraged to implement targeted policies that can empower non-banking financial companies (NBFCs) to better serve small borrowers and micro-entrepreneurs. Key proposals include granting priority sector recognition to gold loan NBFCs, leveraging digital infrastructure for credit access, and rationalizing exposure limits to foster a more equitable financial landscape.

Empowering Gold Loan NBFCs with Priority Sector Status

A significant proposal is to grant priority sector lending (PSL) status to eligible gold loan NBFCs. Currently, these institutions primarily serve small borrowers, often providing loans under ₹50,000 for urgent needs such as medical expenses, education, and working capital for micro-businesses. Unlike banks, which benefit from PSL recognition for similar lending activities, gold loan NBFCs face limitations that hinder their growth and ability to offer competitive rates. By extending PSL status to these NBFCs, the government could create a more balanced playing field, reduce funding costs, and encourage these lenders to expand their reach into semi-urban and rural areas.

Introducing a Gold-Linked Credit Line via UPI

The proposal to introduce a gold-linked credit line through the Unified Payments Interface (UPI) aims to modernize access to credit. UPI has revolutionized transactions for individuals and small businesses, yet credit access has not kept pace. The suggested framework would allow customers to monetize their idle gold jewelry and obtain a revolving credit line through UPI-enabled platforms. This approach could provide immediate access to funds at interest rates ranging from 12% to 18%, significantly lower than those associated with unsecured credit cards. By integrating trusted gold loans with the widely used UPI system, households and small business owners could benefit from more affordable credit options, enhancing financial resilience and promoting responsible borrowing behavior.

Rationalizing Exposure Limits for Gold Loan NBFCs

Another critical area of focus is the need to align single counterparty exposure limits for gold loan NBFCs with those applicable to other NBFCs, currently set at 20% of Tier-1 capital. The existing disparity restricts the lending capacity of these institutions, despite the fact that gold loans are fully secured and have historically maintained strong asset quality. By rationalizing these limits, well-capitalized and regulated gold loan NBFCs would be able to extend credit more efficiently while adhering to necessary prudential safeguards. This change could significantly enhance the lending capabilities of these institutions, ultimately benefiting borrowers.

Creating a Fair Framework for Retail NCD Investors

The role of retail investors in diversifying funding sources for NBFCs is crucial, yet current tax deduction at source (TDS) provisions on listed non-convertible debentures (NCDs) impose a 10% TDS on interest, creating unnecessary compliance challenges. Given that listed securities already provide a transparent audit trail, simplifying TDS norms could facilitate greater market participation. Furthermore, it is recommended to offer higher interest rates for retail investors, pensioners, and senior citizens in public issues of secured NCDs compared to institutional investors. This would cater to the different risk-return expectations of retail investors and encourage broader participation in capital markets, ultimately supporting long-term savings and investment growth.

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