Gold-backed agriculture loans: RBI proposes changes to priority sector lending rules; what could change for borrowers

The Reserve Bank of India (RBI) has proposed changes to priority sector lending (PSL) calculations and documentation requirements for banks, with implications for agricultural lending and the treatment of certain trade-credit exposures.

The proposals include stricter verification of gold-backed agricultural loans and a change in how banks account for trade bills discounted under letters of credit (LCs) while calculating their priority sector lending obligations.

The changes form part of RBI’s draft Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2026, released on November 5. The central bank has invited comments until November 26.

Why are gold-backed agricultuce loans facing tighter checks?

Under the draft, banks will have to maintain details such as the location of land under cultivation, crops grown and hypothecation of crops, wherever applicable. They must also ensure that the sanctioned loan amount is based on the applicable scale of finance and a proper assessment of the credit requirements for the agricultural activity, rather than solely on the type or value of collateral.

Banks will additionally have to maintain records of field visits by officials to monitor the end use of loans.

For landless agricultural labourers and sharecroppers who do not have land records or lease deeds, banks must maintain alternative verifiable documents to establish their eligibility for PSL classification.

However, pledging gold jewellery or ornaments does not automatically disqualify an agricultural loan from PSL benefits.

The RBI draft clarifies, “Bank loans extended for agricultural activities do not become ineligible for priority sector classification merely because the underlying collateral is in the form of gold jewellery or ornaments.”

How will the LC bill discounting affect banks?

Another significant proposal concerns bills purchased, discounted or negotiated by banks under letters of credit.

The RBI has proposed that such bills should not be excluded from ‘bank credit in India’ while calculating net bank credit (NBC) and adjusted net bank credit (ANBC) for PSL purposes. Banks can treat these exposures as interbank exposures for the limited purposes of exposure and capital adequacy calculations, but not for excluding them from the PSL calculation.

This could increase the base against which banks calculate their priority sector lending obligations.

For instance, every additional ₹10,000 crore included in ANBC would translate into an additional PSL requirement of ₹4,000 crore at the existing 40% target for domestic commercial banks.

The corresponding agriculture target would increase by ₹1,800 crore, including a ₹1,400 crore sub-target for non-corporate farmers and ₹1,000 crore for small and marginal farmers.

The non-corporate farmer and small and marginal farmer targets are nested within the agriculture target and should not be added to it separately. The micro-enterprise and weaker-section targets would also increase by ₹750 crore and ₹1,200 crore, respectively.

What could change for borrowers?

For agricultural borrowers, particularly farmers pledging gold jewellery, the proposal does not prohibit gold-backed loans from qualifying as PSL. However, banks may seek more supporting documents on cultivation, crops and loan utilisation, potentially making the verification process more rigorous.

Disclaimer: The RBI’s proposals are part of draft directions and are subject to change following stakeholder feedback.