OPINION | Gold loans haven’t had it better, but lenders shouldn’t throw caution to the wind

Banks accounted for approximately 82% of outstanding gold loans as of March 2025.

Amid record-high gold prices, gold jewellery-backed loans (gold loans) extended by banks and non-banking financial companies (NBFCs) have increased significantly over the last 2-3 years. These loans, predominantly availed by individuals for consumption or business needs, are projected to reach Rs 15 trillion by March 2026, i.e. double the level in March 2023.

Notably, the current gold price has already doubled compared to March 2023 with the majority of the gain seen in the last 12 months. This lays strong ground for gold loan expansion as these loans are largely based on the assessment of the underlying collateral value and as less than 10% of the India’ household gold is estimated to be pledged with organised players.

Banks accounted for approximately 82% of outstanding gold loans as of March 2025 and experienced higher growth compared to NBFCs in the previous two fiscals. Loans provided by banks for agriculture and other business purposes made up about two-thirds of the total gold loan outstanding in March 2025.

Banks’ portfolio of gold loans surges

Banks generally offer more favourable terms for these loans, such as lower interest rates and higher loan-to-value (LTV) ratios, than for loans provided for personal or consumption purposes. This resulted in faster growth of agriculture/business-related gold loans until FY2024.

However, growth slowed down considerably in FY2025 as banks implemented tighter norms for such lending. Additionally, they reclassified some of these loans to the personal/consumption category. This led to a sharp spike in personal/consumption-based gold loans by banks in FY2025, when the outstanding loan increased to ~Rs 2 trillion from ~Rs1 trillion at the beginning of the year.

The same reached almost Rs. 3 trillion in August 2025. The increase was bolstered by large banks placing greater emphasis on this segment due to its risk-adjusted returns and its role in supporting retail loan expansion during periods of heightened risk in unsecured lending.

NBFCs see a moderation

On the other hand, NBFCs have seen a steady moderation in their share over the years. NBFC gold loans remain concentrated with a few players, notwithstanding the steady reduction over the years. Existing large players and other new entrants have significant expansion plans for this segment, which shall further deepen the market. With both banks and NBFCs continuing to focus on this segment, the market, in terms of outstanding loans, has the potential to increase to Rs 18 trillion by FY2027.

Regulatory drive to harmonise practices

The Reserve Bank of India (RBI) issued final guidelines for gold loans in June 2025 (applicable from April 2026) to harmonise key practices of the lenders. These guidelines were significantly watered down compared to the draft guidelines, with relaxation in LTV norms and regarding borrower assessment. The guidelines also covered various operational aspects such as document and process standardisation and transparency in the auction process and in handling the collateral, which are critical considering the target borrower segment.

While the final guidelines were designed to standardise lending practices across all lenders, the RBI's subsequent clarification permitting voluntary pledging of gold with banks for agriculture and micro, small and medium enterprise (MSME) loans, up to their respective collateral-free limits, may provide a competitive advantage to banks.

Short tenures, small ticket size and vulnerable to adverse price movements

Gold loans generally have a smaller loan size and shorter tenures – typically up to one year –resulting in significant portfolio turnover. Data from major NBFCs indicate that annual disbursements often represent 2.5-4.5 times the outstanding loan balance at year end, with higher ratios observed during periods of elevated gold prices.

The growth in NBFC gold loans in the past few years was largely driven by the rise in gold prices even as their gold collateral (in kgs), branch network or borrower base expanded at a very modest rate. Gold loans, therefore, are subject to the risk of adverse movements in gold prices, potentially impacting credit growth or delaying/impacting recoveries.

Notably, international gold prices had declined between 15% and 30% over 6-12 months during 2008-09, 2012, and 2022. When gold prices are buoyant, borrowers typically use these loans as working capital or for other emergency purposes and roll-over the same multiple times without repayment. However, when the gold price trend remains muted or declines, their ability to renew existing loans diminishes. The final guidelines require interest servicing for loan renewals, when implemented.

Historically, loan losses within this segment have remained relatively modest, attributable to the liquid nature of the collateral, which can be auctioned, if necessary. The recent significant rise in gold prices presents a potential challenge for lenders, who must determine whether to ride the wave or maintain conservative credit policies in anticipation of a possible correction in gold prices and applicability of new guidelines from the next fiscal.

(A M Karthik is Senior Vice President & Co-Group Head, Financial Sector Ratings, ICRA Ltd.)

Views are personal and do not represent the stand of this publication.