In early June 2026, the Department of Financial Services sent an urgent communication to India's dozen bullion-importing banks. The message was clear: furnish detailed information on gold metal loans and loans backed by gold from 2023 onwards. Banks were asked to submit data by Monday, covering value, volume, customer counts, international gold suppliers, portfolio sizes, collateral amounts, and borrower numbers. In some cases, month-wise figures were requested.
This wasn't routine paperwork. It came just weeks after the government raised gold and silver import duties to 15% from 6%, reversing tax cuts introduced in the 2024-25 Union Budget. The structure now includes 10% basic customs duty plus 5% Agriculture Infrastructure and Development Cess. The timing was strategic—June and July are typically slow months for gold demand, making it ideal for examining policy options without disrupting peak seasons.
The urgency stems from a troubling disconnect. Despite importing 721 tonnes of gold in 2025-26—4.76% less than the previous year—India's gold import bill surged 24% to a record $71.9 billion. The average price of imported gold jumped to $99,825.38 per kg from $76,617.48 in the previous financial year.
India is the world's second-largest gold consumer after China, meeting almost all demand through imports. This creates persistent pressure on the current account deficit and foreign exchange reserves. The rupee has already weakened to 95.63 per US dollar, a record low. With elevated crude oil prices and Middle East tensions disrupting shipping through the Strait of Hormuz, the government views gold imports as a luxury India can ill afford right now.
Gold metal loans sit at the heart of this scrutiny. Introduced in 1998 for exporters and later extended to jewellers, GMLs allow nominated banks like Axis Bank to lend physical gold to jewellery manufacturers instead of rupees. Banks either borrow gold from international lenders or procure it from overseas banks under consignment arrangements, making outright payments based on confirmed domestic demand.
This creates a regulatory blind spot. While traditional imports attract duties, gold entering through lending channels may not be fully captured by existing import control mechanisms. The RBI had already asked banks to estimate their GML exposure for the current year before the Finance Ministry's communication was issued, suggesting coordinated regulatory action.
The requirement to submit month-wise GML figures will significantly increase operational costs for the dozen banks involved in gold imports. They'll need advanced tracking systems, dedicated compliance teams, and enhanced audit trails. RBI guidelines already require preservation of all import documents for at least five years. The new reporting demands will force banks to reengineer processes from aggregate reporting to transaction-level monitoring.
For banks that have built significant lending portfolios around GMLs, potential restrictions pose business model risks. GMLs generate interest income based on procurement costs plus relevant spreads. Restrictions would directly reduce this revenue stream while fixed costs for maintaining international relationships and compliance systems remain. Banks may face higher capital requirements and increased provisioning for GML exposures under Basel III norms.
Jewellers would feel the pinch acutely. GMLs typically offer lower interest rates than traditional working capital loans since they're secured by physical gold. Restrictions would force jewellers toward conventional bank loans or more expensive financing options. The efficiency of obtaining gold directly as working capital—eliminating the need to convert cash to gold—would be lost.
The working capital cycle would extend considerably. Without GMLs, jewellers must arrange cash financing, purchase gold, manufacture jewellery, sell products, and then repay loans. During peak seasons like weddings and festivals, the inability to quickly access gold through GMLs could result in stock-outs and lost sales.
Industry participants have proposed an alternative: banks should use gold bars refined from dore instead of importing fresh gold for issuing GMLs. Dore is unrefined gold processed by domestic refineries before conversion into refined bars. This approach offers several advantages.
It creates domestic value addition and employment while reducing fresh gold import needs. Dore contains impurities removed during refining, effectively reducing net gold import requirements. Domestically refined gold offers better traceability for regulatory compliance and anti-money laundering requirements. It also provides logistical advantages by reducing dependence on international shipping and customs clearance.
The proposal extends beyond banks. Industry executives suggest gold exchange-traded funds could also purchase bars refined from dore rather than imported gold. India's gold ETFs held approximately 20 metric tonnes as of Q1 2026, with inflows jumping 186% year-on-year during the March quarter. At current prices, shifting this volume to domestically refined dore could reduce imports by roughly $2 billion annually.
Industry representatives have proposed permitting gold exports under specific conditions to help jewellers manage unsold inventory during weak domestic demand periods. This would provide crucial inventory liquidation mechanisms, allowing jewellers to export excess inventory internationally rather than holding it during domestic demand troughs.
Export provisions would enhance operational flexibility significantly. During seasonal demand fluctuations, jewellers could export during low-demand periods rather than forced inventory holding. When gold prices decline domestically, access to international markets would provide a natural hedge against inventory devaluation. Export proceeds would offer immediate liquidity, improving working capital cycles.
For these provisions to work, the RBI would need to establish export-linked GMLs with repayment terms aligned to export cycles, enhanced documentation to track export-oriented gold usage, and regular monitoring to ensure compliance.
The regulatory changes would significantly affect relationships between Indian banks and overseas bullion suppliers like JP Morgan and Standard Chartered. These partnerships encompass gold sourcing, consignment arrangements, price discovery, hedging instruments, and trade finance.
Restrictions on GMLs would reduce the credit exposure that international suppliers have to Indian banks, prompting revised risk assessments. Lower GML volumes would reduce the operational scale of relationships, potentially affecting the economics of these partnerships. Suppliers may need to optimize credit allocation across markets based on changing regulatory environments.
Under current consignment arrangements, banks procure gold from overseas banks and make outright payments based on confirmed domestic demand. GML restrictions would directly decrease import volumes and consequently the gold available for return to suppliers. Banks would optimize inventory levels more aggressively, reducing buffer stocks and return volumes.
If India implements a broader export framework for unsold gold to consuming markets like China and Turkey, international suppliers would need to adapt significantly. Their role would transform from import supplier to export partner, requiring management of bi-directional gold flows and new operational capabilities.
This could fundamentally alter long-term market structure. India might develop as a regional gold trading hub, traditional supply chains would reconfigure around new trade flows, and new price discovery mechanisms would incorporate Indian export flows. International suppliers would face revenue stream diversification opportunities but also more complex risk management requirements for multi-market operations.
The Finance Ministry's data request is likely just the beginning. The government has several policy options under consideration, including restricting cash purchases of gold or reserving a portion of imported gold for exporters under an 80:20 scheme similar to previous arrangements.
The proposed measures could have substantial quantitative impact.
However, actual outcomes depend on implementation effectiveness and market response. Gold demand has proven relatively inelastic despite price increases. Higher restrictions could increase smuggling, which had reduced after India lowered tariffs in mid-2024. The government will need to balance regulatory objectives with market realities to achieve sustainable outcomes.
For now, banks, jewellers, and international suppliers are in a holding pattern, awaiting the next policy move while preparing their operations for a more regulated gold lending environment.
