Banks have seen a surge in gold loans as prices for the yellow metal have soared and the Reserve Bank of India (RBI) has worried that aggressive lending in this segment can lead to a build-up of bad debt if irregular practices are not corrected. 

In the six months through September, gold loan outstandings have surged 43.4% to Rs 147,081 crore versus Rs 102,562 crore in March 2024.

Along with the non-banking financial companies (NBFCs), the gold loan book has crossed Rs 3 lakh crore. Muthoot Finance, India’s largest gold loan NBFC, has Rs 75,827 crore of gold loan assets under management and holds 188 tonnes of gold pledged by customers as of March 2024.

In 2022-23, gold loan growth was 14.6%, RBI data shows.

The recent spurt in gold loans has led the Reserve Bank of India (RBI) to issue directives after finding deficiencies in loans offered by supervised entities (SEs) against pledge of gold ornaments and jewellery. The irregularities include flouting loan-to-value (LTV) ceiling rules, valuing gold in the absence of a customer, credit appraisal shortcomings, inadequate due diligence, incorrect application of risk-weights and lack of end use monitoring of gold loans.

In case of partnerships with fintech entities and business correspondents, the RBI found certain violations of rules. These included credit appraisal and valuation done by business correspondents, storage of gold in their custody, delayed and insecure mode of transportation of the metal to the branch and KYC compliance being done through fintechs. 

The central bank said some gold loans got sanctioned without purpose and some were closed within a few days. Many were disbursed in cash much beyond limits.  

In the backdrop of explosion in the gold loan market, the RBI has asked lenders to comprehensively review their policies, processes and practices to identify gaps while offering such loans and initiate remedial measures in a timebound manner. The circular is addressed to the supervised entities of the RBI — all commercial banks, including small finance banks, primary (urban) co-operative banks and NBFCs.

With prices rising, banks and NBFCs are finding gold loans an attractive lending option to individual customers as well as MSMEs (micro, small and medium enterprises). Consumers also stand to benefit as they can get a higher quantum of loan with the same quantity of gold. 

Pressured to slow down their unsecured personal loans as the RBI has raised risk weights against them, lenders are finding gold loans a safer bet to expand while keeping a check on their non-performing assets (NPAs) as it is easier to auction in case of a default. They have taken to digital gold loans, top-ups and doorstep lending to push growth in loan volumes in this segment.