Bank gold loans on a tear as customers want more for their pledge

Banks handed out more gold loans than any other type of retail loan including home loans in FY26, Reserve Bank of India (RBI) data available up to end-July showed. While they disbursed ₹70,675 crore of home loans, the figure for gold loans stood at ₹85,432 crore. The momentum is expected to pick up further, after banks were recently allowed to lend more against the precious metal.

Gold prices rose 23% this fiscal year to touch ₹109,390 per 10 grams on 12 September, MCX data showed. When gold prices go up, borrowers can get more loans for the same amount of gold. While some of the increase in gold loans was indeed thanks to higher gold prices, experts said the lack of other easy avenues is driving many customers requiring urgent short-term loans to turn to gold.

“The unsecured channel—personal loan, credit cards—has gone a little bit tighter for people to raise money from and many are also using gold loans to fulfil working capital requirements for some small businesses,” said Jinay Gala, director at India Ratings and Research.

Beating mortgage

While gold loan disbursals grew 40.9% since the end of March, and 122% over the same period last year, home loans rose 2.3% since end-March, and 9.6% on a year-on-year basis. To be sure, outstanding gold loans at ₹2.9 trillion are still a fraction of the ₹30.8 trillion housing loans.

Personal loans—those not backed by collateral—stood at ₹15.4 trillion at the end of July, up 1.5% from the beginning of the fiscal, and 8.1% year-on-year (y-o-y). The pace of growth of these loans slowed after multiple RBI warnings to banks on risk from rising personal loans, culminating in a 2023 directive that made it more expensive for banks to make these loans.

According to Gala, the rising price of gold has encouraged more people to use it as loan collateral. At many banks, about 60-70% of the gold loan book comprises repeat customers, or those who have borrowed from the lender in the past.

Banks Vs NBFCs

Traditionally a stronghold of non-bank lenders focused on lending against gold, banks have boarded the gold loan bandwagon in the last few years. With large public sector banks like State Bank of India (SBI) and Bank of Baroda (BoB) pushing gold loans, competition has heated up.

The surge is expected to continue, after RBI allowed lenders in June to lend more against gold, by raising the so-called loan-to-value ratio.

“With the recent circular on gold, the gold loan business grew quite strongly in June, and we will see the full impact of that playing through from this quarter onwards,” Venkatraman Venkateswaran, executive director and chief financial officer, Federal Bank told analysts on 2 August. Federal Bank’s gold loans stood at ₹31,262 crore in Q1 FY26, up 14% y-o-y.

At the end of September 2024, retail gold loans by non-bank financial companies (NBFCs) stood at ₹1.7 trillion, as against ₹1.5 trillion from banks, showed data from RBI. While data on sectoral deployment of bank loans are released every month, a similar data for NBFCs appear yearly in RBI’s report on trends and progress of banking in India every December.

Regulatory angle

“In the incremental credit flow of credit, gold loans have surpassed housing loans. One reason for the surge in gold loans is rising gold prices and more lenders are shifting to secured loans,” said Anil Gupta, senior vice-president at rating agency Icra.

While banks prefer more secured loans since these are backed by collateral and allow better recoveries in case a borrower defaults, gold loans are not the easiest to assess and sanction. “However, gold loan is an operationally intensive business to run. There are strict regulations on how the branch has to be secured with a vault, valuation of gold and auctions, among others,” said Gupta.

There is also a regulatory angle to this surge in gold loans. Experts said that RBI has been clamping down on the practice of classifying gold loans as agricultural gold loans. While banks can lend up to 75% of the value of gold to retail customers, many lenders give up to 85% when it is pledged by borrowers engaged in agriculture.

“There has been some amount of regulatory change that says banks cannot arbitrarily classify regular gold loans as agricultural gold loans,” said Gala of India Ratings. “Some banks were classifying gold loans as agri gold loans, but the regulator is aligning assessment and classification methodology to remove the arbitrage. This has led to reclassification of these loans as regular gold loans, adding to the volume.” said Gala.