The spike in gold prices this year is more than a windfall for investment portfolios. With gold price touching record levels, collateral values have flipped the economics of gold-backed lending overnight. For lenders that specialise in gold loans, and for banks with sizeable exposure, the implications are immediate and mixed.
Let’s look at how this influences the market.
First, the obvious upside. Higher metal prices raise the market-to-market value of pledged jewellery, improving loan-to-value (LTV) cushions for the same quantum of lending. That has allowed gold-loan NBFCs to expand disbursements and assets quickly.
That’s the reason why several gold loan-focused companies reported double-digit AUM growth in 2025, and market commentary points to robust demand and improved margins for Muthoot and Manappuram. For lenders, this translates into lower immediate provisioning pressure and stronger recoverability on loans backed by the same physical gold.
That said, the gain is not risk-free. Rapid price rallies can create a two-edged dynamic. Lenders may be tempted to extend larger loans against appreciating gold, thus pushing out credit growth, while borrowers, particularly in rural and semi-urban markets, may treat higher valuations as a chance to monetise holdings and take fresh credit.
That can raise leverage and behavioural risks if prices reverse. Hence, tougher RBI rules on LTV rules this year. These changes will compress the headroom NBFCs enjoyed and force tighter underwriting for larger loans.
Operationally, higher gold prices also strain the supply chain. Jewellery demand weakens when prices spike, which dents the retail ecosystem and manufacturer cash flows that sometimes rely on credit lines from banks.
For banks with retail and trade exposures to jewellers, that is an indirect credit risk even as their gold-loan books look healthier on paper.
Also, lenders must be careful about credit quality. Historically, gold loans have low headline NPAs because the collateral is liquid. But systemic risk emerges if a prolonged correction forces auctions, compressing recovery values and hitting earnings.
NBFCs with conservative valuation practices, transparent client documentation, and diversified liabilities will weather volatility better. Those that leaned on informal valuation, high leverage, or aggressive LTVs will face the harshest test when the market rebalances.
What should banks and NBFCs do? First, resist the temptation to chase growth purely on rising collateral values. Second, tighten documentation and borrower-level concentration checks, especially where multiple loans may be taken against the same asset. Third, manage funding prudently. Retail deposits and sticky liability profiles matter when markets swing.
To sum up, the gold surge is a blessing that demands discipline. For gold-loan specialists it has reopened the growth engine; for banks, it has temporarily improved collateral metrics. But both must treat valuation gains as volatile capital.
(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)
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