Gold rush: Soaring prices drive consumers to pledge their assets

As per RBI guidelines, lenders in India, including banks and NBFCs, are allowed to offer a maximum loan-to-value (LTV) ratio of 75 per cent. This means that borrowers can get up to 75 per cent of the market value of their gold as a loan.

Gold prices have skyrocketed by over 25 per cent in the last year, making the precious metal an increasingly valuable asset and a good collateral. Prices of 999 variety gold was quoted at Rs 84,610 per 10 gm in the Mumbai bullion market on Thursday. This substantial price appreciation has prompted people to access higher loan amounts against their gold holdings, boosting the popularity of gold loans. Gold was in demand in the recent days amid fears of a global trade war in the wake of the decision of US President Donald Trump to hike import duty on goods from China, Mexico and Canada.

What has made gold loan an attractive option for individuals seeking immediate financial assistance is the ease of obtaining these loans, coupled with minimal documentation and swift processing. Major financial institutions, including PSU banks, offer instant gold loans with flexible repayment options, further increasing their attraction.

Gold holds a significant place in Indian culture, often being accumulated over generations. During times of financial needs like hospital expenses and college fees, individuals are more willing to pledge their gold holdings like jewellery to secure loans.

“The slowdown in the economy in the last a few months would have prompted consumers to pledge gold to meet the financial requirements. During periods of economic uncertainty like trade wars or inflation, gold is perceived as a stable asset, prompting individuals to opt for gold loans to meet immediate financial needs,” said an analyst. The growth of digital platforms, apps and fintech solutions has also made gold loans more accessible and attractive, even in remote areas, contributing to their rising popularity.

As gold prices continue to glitter, gold loans are likely to remain a popular financing option for individuals across the country.

However, bad loans in the segment are also rising. Gold loan non-performing assets (NPAs) – or loans defaulted by borrowers – of banks and non-banking finance companies (NBFCs) rose 30 per cent to Rs 6,696 crore as of June 2024 from Rs 5,149 crore just three months ago in March 2024, according to data provided by the Reserve Bank of India (RBI). The central bank took note of the irregular practices in the gold loan sector and directed lenders to review their policies and practices. RBI has also identified weaknesses in monitoring LTV ratios, incorrect application of risk weights, and lack of transparency during auctions of gold ornaments and jewellery.

The growing concern of gold loan defaults highlights the need for lenders to strengthen their credit assessment and verification processes, enhance financial literacy programs for borrowers, and implement more flexible repayment options. According to a World Gold Council (WGC) report, gold demand in the country in 2024 stood at 802.8 tonnes, as against 761 tonnes in 2023. The total gold demand value went up by 31 percent at Rs 5.15 lakh crore in 2024, compared to Rs 3.92 lakh crore in 2023.