Gold loan boom brings early stress signals for NBFCs

Gold loan demand has surged across India, with several non‑bank financial companies (NBFCs) reporting record disbursements in the last quarter. The boom, driven by a sharp rise in gold prices and an easing of liquidity in the retail sector, has brought early warning signals for asset quality, analysts say. While some lenders such as Bajaj Finance have begun to see the impact on their portfolios, others have only recently started to flag the problem.Bajaj Finance, which has long dominated the gold‑loan market, disclosed in its latest financial statements that its short‑tenure gold‑loan books have shown a modest deterioration in net interest margin..

The company attributed the change to a spike in late‑payment cases that were previously considered “normal” due to the short repayment windows. The lender’s senior risk officer warned that “the current trajectory, if left unchecked, could erode profitability and strain capital adequacy ratios.”Piramal Finance, a smaller player, issued a cautionary note that a significant proportion of its recent disbursements has been directed to borrowers with a history of serious delinquencies. The company’s chief credit officer highlighted that the proportion of loans taken by repeat defaulters has risen from 8 per cent in the previous year to nearly 12 per cent in the most recent quarter..

This trend, she said, “suggests that the demand for gold loans is outpacing the due diligence process that is crucial for maintaining asset quality.”The gold‑loan market has grown at an annualised rate of more than 10 per cent over the past five years, according to data from the Reserve Bank of India (RBI). The growth has been propelled by several factors. First, the price of gold has hovered near record highs, making it an attractive collateral asset for borrowers..

Second, the RBI’s monetary policy easing, which has kept bank rates low, has encouraged consumers to seek alternative financing options. Finally, a series of policy changes in 2022, including the removal of a 12‑month maturity requirement for gold loans, have broadened the market.The rise in demand, however, has led to a more competitive landscape, with NBFCs expanding aggressively into new territories and offering aggressive promotional rates. In many cities, the average interest rate on a gold loan has fallen below 15 per cent, down from the 18‑20 per cent range that dominated the market a year ago..

The competition has pushed lenders to relax underwriting standards, cutting corners on collateral verification and borrower profiling.The consequences of such laxity are already being felt. In the latest RBI report, the central bank noted a 20 per cent rise in the gross non‑performing asset (GNP) ratio for gold loans across the sector. The report said that the GNP ratio for NBFCs’ gold loans climbed from 4.2 per cent in 2021 to 5.1 per cent in 2022..

While the overall ratio still falls within the RBI’s acceptable thresholds, the upward trend is a cause for concern.Analysts have pointed out that the nature of gold loans makes them particularly vulnerable to early stress signals. Because the collateral is a physical asset rather than a paper asset, it is subject to market fluctuations. If the price of gold drops, the collateral value may become insufficient to cover the outstanding loan balance..

Even if the gold price remains stable, the risk of borrower default remains high due to the short repayment terms that typically last between 12 and 24 months.A study by the Institute of Banking and Finance (IBF) found that among the top 50 NBFCs, those with the highest gold‑loan exposure have experienced a 15 per cent increase in the average time to default over the past two years. The study also identified a correlation between the use of automated credit scoring systems and a reduction in the quality of underwriting. While automation speeds up processing, it can miss nuances that human analysts would catch, such as sudden changes in a borrower’s financial circumstances.In response to the rising risk, several NBFCs have tightened their underwriting guidelines..

Bajaj Finance, for instance, now requires an additional 10 per cent margin on the loan-to-value ratio for new gold loans. The company also mandates that borrowers provide a secondary source of collateral in case the gold value falls below a certain threshold. Piramal Finance has introduced a stricter credit scoring model that assigns higher risk weights to borrowers with a history of late payments..

Both lenders have also increased the frequency of portfolio reviews to capture early signs of deterioration.The RBI, meanwhile, has taken a proactive stance by issuing a set of guidelines aimed at strengthening risk management practices in the gold‑loan segment. The guidelines recommend that NBFCs maintain a minimum collateral coverage ratio of 120 per cent for all gold loans. They also urge lenders to conduct regular re‑valuation of collateral and to keep detailed records of borrower interactions..

The RBI’s guidelines are expected to take effect from the beginning of the next fiscal year.Industry observers note that while the gold‑loan market is currently profitable, the long‑term sustainability of this growth is uncertain. The sector’s reliance on physical gold as collateral makes it highly sensitive to market shocks. A sudden dip in gold prices, for example, could trigger a wave of write‑downs..

Moreover, the regulatory environment is tightening, with the RBI threatening to impose higher capital charges on institutions that fail to meet the new collateral coverage ratios.In a recent interview with the Financial Express, the head of risk management at a leading NBFC said that the company is “re‑evaluating its exposure to gold loans as part of its broader strategy to balance growth with risk.” He added that the firm was exploring the possibility of diversifying its collateral base to include other hard assets such as jewellery, real estate, and agricultural produce.The broader implications of the gold‑loan boom extend beyond individual lenders. A significant deterioration in asset quality could ripple across the financial system, affecting liquidity, capital adequacy, and investor confidence. It could also prompt a tightening of credit conditions for other sectors, as banks and NBFCs pull back on new lending to shore up their balance sheets.For consumers, the trend means that while gold loans remain an attractive option for quick cash, the risk of over‑exposure and potential loss of collateral should not be underestimated..

Financial literacy programmes are being promoted by various NGOs and government bodies to educate borrowers on the terms of gold loans and the importance of timely repayment.Looking forward, industry analysts predict that the gold‑loan market will continue to grow, albeit at a slower pace, as lenders adapt to stricter regulatory norms and implement more robust risk management frameworks. The sector’s resilience will hinge on its ability to balance aggressive growth strategies with disciplined underwriting practices, ensuring that short‑term gains do.