Synopsis: The organized gold loan market in India, encompassing both banks and Non-Banking Financial Companies (NBFCs), is projected to surpass Rs. 10 lakh crore in FY25 and is expected to reach Rs. 15 lakh crore by March 2027. Between March and June 2024, Non-Performing Assets (NPAs) related to gold loans increased by 30%, indicating escalating financial stress among households.
The organized gold loan market in India has witnessed substantial growth, with projections indicating it will exceed Rs. 10 lakh crore in the current financial year (FY25) and potentially reach Rs. 15 lakh crore by March 2027.
This growth is driven by both banks and NBFCs, with banks focusing on agriculture-backed loans and NBFCs leading in retail gold loans.
However, this expansion is accompanied by a concerning rise in Non-Performing Assets (NPAs) related to gold loans.
Data from the Reserve Bank of India (RBI) indicates that gold loan NPAs increased by 30% between March and June 2024, climbing from Rs. 5,149 crore to Rs. 6,696 crore.
Commercial banks reported a 62% surge in NPAs, reaching Rs. 2,445 crore, while NBFCs saw a 24% increase to Rs. 4,251 crore during the same period.
This uptick in defaults is attributed to the slowing economy, which has adversely affected income levels, making it challenging for borrowers to meet their repayment obligations.
Many individuals have resorted to pledging gold to cover essential expenses such as household needs, education fees, and medical costs, only to find themselves unable to repay the loans.
In response to the rising defaults, the Reserve Bank of India (RBI) and the government have tightened regulations governing gold loans.
Public sector banks have been instructed to review their gold loan portfolios sanctioned between January 2022 and March 2024 to ensure compliance with regulatory norms.
Additionally, the RBI has directed banks and NBFCs to assess risks in their gold loan policies, strengthen controls over third-party service providers, and address valuation discrepancies.
A key regulatory measure is the loan-to-value (LTV) ratio, which caps gold loans at 75% of the jewellery's value.
Lenders are required to maintain this ratio throughout the loan tenure to mitigate risks arising from gold price fluctuations and valuation errors.
Furthermore, bullet repayment loans—where both principal and interest are repaid at maturity—are restricted to a maximum tenure of 12 months to curb default risks.
Conclusion:
The significant growth in India's organized gold loan market underscores the increasing reliance on gold-backed financing among households.
However, the concurrent rise in NPAs highlights the financial strain faced by borrowers amid economic uncertainties.
The regulatory interventions by the RBI and the government aim to strengthen risk management practices and ensure the stability of the gold loan sector.
As the market continues to expand, it is imperative for lenders to balance growth with prudent lending practices to safeguard both their interests and those of the borrowers.
Disclaimer: This article is for informational purposes only and should not be construed as financial or investment advice. Readers are encouraged to consult with qualified financial advisors before making any financial decisions.
