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Informist, Thursday, Apr. 17, 2025

By J. Navya Sruthi

MUMBAI – A sharp rise in bank loans against gold has prompted the Reserve Bank of India to mull fresh regulations on such funding. A rapid rise in gold prices has pushed up demand for loans against the precious metal by individuals and families. This has made the central bank wary about the possibility of such loans turning non-performing assets, experts said.

Data released as on Mar. 27 by the RBI shows that gold loans have emerged as the fastest category in the deployment of bank credit. The credit outstanding of banks against gold jewellery as on Feb. 21 shot up by 87.4% from a year ago to INR 1.91 trillion. A year ago, the rise was much lower at 15.2%. In the same period, total bank credit at INR 179.8 trillion registered a growth of 11.0%, down from 20.5% a year ago.

On Apr. 9, the RBI issued draft norms to regulate lending against gold by banks and non-bank financial companies and invited public comment by May 12. The guidelines propose that the maximum loan-to-value ratio with respect to gold loans will not exceed 75%, which would apply to all gold loans sanctioned by non-bank lenders, irrespective of the purpose for which loans have been sanctioned. The draft also proposes that in case of bullet repayment loans, the loan-to-value ratio should be computed by treating the total amount repayable by the borrower at maturity rather than the loan sanctioned at origination.

The RBI has also sought to sharpen the end-use monitoring of such loans. "Loans against gold have reached huge proportions," said N.S. Ramaswamy, head, CRM and Commodities at Ventura Securities. The end-use monitoring is called for because in some cases the money may be used for unproductive purposes, he said.

Earlier, the central bank had removed loans against gold jewellery acquired by banks from NBFCs for priority sector lending. Besides, in March, the government had decided to discontinue the gold monetisation scheme.

Gold loan outstanding of banks and non-banking finance companies and bad loans, or non-performing assets in the segment, have grown substantially. According to a media report, the non-performing assets rose by INR 15 billion on year to INR 68.24 billion as of December. They were INR 53.04 billion in the same period previous year. Of the total non-performing assets, gold loans reported by commercial banks were INR 20.40 billion, up from INR 14.04 billion the previous year. Finance companies giving out gold loans reported bad loans of INR 47.84 billion as of December against INR 39.04 billion a year ago.

Analysts and market participants said the current volatility in gold prices is the reason for the measures proposed by the RBI. As of Thursday, gold prices have surged 41.2% on year to $3,371.9 per ounce on the COMEX and have shot up by 31.2% from a year ago to INR 95,935 per 10 grams on the Multi Commodity Exchange of India. The prices are at a new lifetime high.

"In such a volatile environment, gold loans become more attractive, increasing systemic risk if not properly regulated," Kedia Advisory said in a note. "The goal is to prevent speculative borrowing and ensure asset quality remains sound amid volatile collateral pricing."

However, Gnanasekar Thiagarajan, director of Commtrendz Research, said the sole purpose of tightening rules may be because the central bank wants to reduce the import value of gold which lowers the pressure on the country's current account deficit. He said these changes will also lead retail investors to shift from gold to fixed deposits, which increases liquidity with banks.

Kedia Advisory said demand for gold loans may moderate in the short term due to increased operational friction. "Bullet loans, popular among self-employed and farmers, may reduce as LTV (loan-to-value ratio) must remain under 75% till maturity."

However, the brokerage said demand for gold loans is fundamentally strong as India holds over 25,000 tonnes of household gold, and over 65% of gold loan disbursement is driven for urgent short-term liquidity needs like health, education, or business cash flows. So, in the long-term, demand for such loans is seen resilient, it added.  End

US$1 = INR 85.36

With inputs from Abhijit Doshi 

Edited by Ashish Shirke

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