India's glittering gold loan sector risks sliding into a dark zone

Synopsis

The gold loan market in India is on a rapid growth trajectory, fueled by true demand alongside possible financial distress among borrowers. According to the Reserve Bank of India, there's significant annual growth in gold loans issued by banks and NBFCs. Heightened competition might bring challenges in assessing borrower viability and repayment options. While regulatory changes aim to create a stable environment, they could introduce operational hurdles for lenders.

India’s gold loan boom might run into an uncomfortable question. How much of the growth reflects genuine demand for credit, and how much is helping financially stretched borrowers stay afloat? Banks and non-banking financial companies (NBFCs) have expanded lending against jewellery at a blistering pace, drawn by rising gold prices and the security of a tangible asset.

However, a surge in gold loans may partly reflect borrower stress, with lenders allowing customers already in deep delinquency to borrow against gold and repay overdue loans, Macquarie has said, as per a TOI report. Fresh warnings from Bajaj Finance and Piramal Finance, too, suggest that some borrowers are pledging gold even as they struggle to repay loans elsewhere.

Gold loans are not inherently risky but are safer than many other types of loans. However, the collateral may be disguising weaknesses in borrowers’ ability to service debt. A sharp correction in gold prices alongside a broader deterioration in repayments could put the sector’s risk controls to a serious test.

A booming market with an emerging fault line

According to the Reserve Bank of India (RBI), bank loans against gold jewellery rose 88.1% year-on-year to Rs 5.52 lakh crore as of July 31, 2026. Growth, however, had moderated from 136.4% a year earlier as lenders adjusted to stricter RBI regulations.

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The expansion continued beyond the banking system. Reuters has reported that outstanding gold loans from banks had risen 83% year-on-year to around Rs 5.6 lakh crore as of August 31, while NBFC gold loans grew 69% to Rs 3.6 lakh crore.

Gold has become a major force in retail credit. Macquarie Capital's Suresh Ganapathy told TOI that gold loans accounted for nearly 28% of non-housing retail lending, making them the second-largest retail lending category after mortgages. The segment also contributed a third of incremental retail lending in the first quarter of FY27, according to the newspaper.

The growth outlook remains strong. As per a recent ICRA report, the gold loan market could expand by more than 30% over the following two years to Rs 30 lakh crore by March 2028. But the latest warnings raise questions about the quality of that expansion, particularly as more lenders compete for borrowers.

When fresh credit only repays existing loans

During the company's second-quarter earnings call, Piramal Finance managing director and chief executive Jairam Sridharan said 15% to 23% of industry gold loan disbursements in FY26 went to borrowers who were already more than 90 days overdue on at least one other loan. He estimated the value of such disbursements at Rs 4.7 lakh crore, according to Reuters. To be sure, Sridharan said Piramal does not lend to customers more than 90 days past due on other loans. He said such borrowers accounted for less than 1% of the company's own gold loan disbursements so far in October.

The industry figures cited by Sridharan do not mean that this proportion of gold loans has turned bad. They point instead to a potentially vulnerable borrower pool. A customer who pledges jewellery to repay an overdue personal loan may temporarily clear one obligation without improving the income available to meet future repayments.

Ganapathy told TOI that collections teams at some lenders could be directing overdue borrowers towards gold loans to settle existing dues. If that practice is widespread, lenders may be financing a transfer of debt between institutions rather than generating genuinely sustainable credit demand.

Sridharan cautioned that the presence of a gold loan in a borrower's credit file does not, by itself, indicate higher portfolio risk.

Gold loans serve a range of legitimate needs, from household emergencies to working capital for small businesses. India Ratings' Jinay Gala told Reuters that gold may be the principal financial asset for households in smaller cities, while some urban borrowers use larger loans for working capital or income generation. Their ability to repay can differ considerably.

Regulation is changing the lending model

The RBI has already tightened oversight of the sector. Its revised Lending Against Gold and Silver Collateral Directions, issued in June 2025, introduced a common framework for regulated lenders and took effect from April 1, 2026.

The framework replaced the earlier uniform 75% loan-to-value ceiling with a tiered structure. Lenders can offer loans of up to 85% of the value of eligible gold collateral for amounts up to Rs 2.5 lakh, 80% for loans above Rs 2.5 lakh and up to Rs 5 lakh, and 75% for larger loans.

The rules also limit consumption-focused bullet-repayment loans to 12 months. These changes affect both the amount borrowers can access and how they must repay it.

The regulatory shift has created operational challenges even as lenders seek growth. For lenders, the challenge is to distinguish repayment problems caused by product design or transition-related disruption from a deeper deterioration in borrower finances.

A rush of new entrants raises the stakes

The sector's appeal is attracting lenders well beyond traditional gold loan specialists. In July, Tata Capital announced the acquisition of an 88.6% stake in Yogakshemam Loans. Later, Godrej Capital bought the gold loan business of Kanakadurga Finance. Both moves gave the companies an operating foothold in a market where building a branch network from scratch can take time.

ET reported in August that Aditya Birla Capital intended to establish 200-300 dedicated gold loan branches by March 2027, with a longer-term target of around 1,000 branches. L&T Finance has also planned to add 500 gold loan branches during the current financial year.

The rush reflects the attraction of a secured product at a time when lenders are seeking growth beyond conventional unsecured personal loans. But competition can become a vulnerability if institutions prioritise rapid disbursements over careful borrower assessment. New entrants must build appraisal, monitoring and collection capabilities even as they compete with established lenders that have years of experience in local gold markets.

Gold collateral is not a complete safety net

The sector's biggest cushion is also the source of potential complacency. Unlike an unsecured personal loan, a gold loan gives the lender an asset that can be sold to recover dues. That can keep losses relatively low even when borrowers default.

But this collateral does not guarantee full recovery under every scenario. Macquarie's Ganapathy has warned that a sharp fall in gold prices coinciding with rising defaults could test lenders' assumptions about recoveries.

If many borrowers default together, lenders could be forced to auction jewellery in large volumes, potentially putting pressure on realisations. Auction procedures and operational constraints could add to the challenge.

There is a regulatory buffer, however. The RBI's tiered loan-to-value limits are intended to maintain a margin between the loan amount and the assessed value of the pledged gold. But that cushion can narrow if prices fall steeply after a loan is disbursed. Higher permitted loan-to-value ratios for smaller loans also make disciplined valuation and ongoing monitoring important.

The risk is not that a fall in gold prices would automatically trigger widespread losses. It is that falling gold prices and deteriorating repayment capacity could reinforce each other at a time when lenders are dealing with a large volume of overdue accounts.

The test is the quality of growth

Bajaj Finance has said its increase in early delinquencies was largely linked to short-tenor products and does not expect the deterioration to affect credit costs materially. The company has stopped offering those schemes and favours managing repayment risks early rather than relying on auctions. That suggests at least part of the recent stress may be product-specific rather than evidence of a broad-based credit crisis.

The whole industry would need to ensure that growth is supported by borrowers who can repay, not simply by the rising value of the gold they pledge. The next few quarters will show whether early delinquencies migrate into non-performing assets and whether lenders begin tightening their underwriting standards.

For now, the gold loan boom has considerable room to grow. But its long-term health will depend on whether lenders can separate genuine credit demand from the refinancing of financial distress.

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