Page 45 - Banking Finance February 2026

ARTICLE
ARTICLE
largest market in the world for gold jewelry. Weddings, fes- gold loans have been properly formalized, and to this day,
tivals, and other auspicious occasions in India account for a the unorganized or smaller pawnshops still exist in large
large portion of gold demand, and its cultural significance numbers, especially in small towns.
has been responsible for the consistent high demand across
generations. With the rising gold prices, the demand for With the rising gold prices, India's gold loan market has be-
gold jewelry fell in the first quarter of the current financial come more attractive. So far, the year 2025 has seen a
year, as compared to the same period of the last financial record surge in global gold prices. On the 1st of January,
year; however, industry experts believe that the demand 2025, the price for 24-carat gold was around Rs. 7800 per
will pick up in the third and fourth quarters. gram, and in September 2025, the same gold is now trad-
ing around Rs. 11,959 per gram, which is a return of 53.32%
The following image shows where India and China both in 9 months. In recent years, the gold loan portfolio of banks
stand as compared to the rest of the world in terms of con- and NBFCs has seen unprecedented y-o-y growth of more
sumption of gold for jewelry. than 100%, and the reasons for increasing gold prices can-
not be ascertained in black and white; however, the most
Tonnes Q1’24 Q1’25 Year-on-year
%Change talked-about reason is growing geopolitical uncertainty. For
banks and regulators, the growing gold prices could have
World Total 480.1 380.3 -21 W multifaceted effects on gold loans.
India 95.5 71.4 -25 W
China, P.R.: Mainland 184.4 125.3 -32 W On one hand, with the increasing value of gold, existing
borrowers may want to apply for top-up loans or new loans;
Image Source : World Gold Council Website
banks and NBFCs may experience higher loan disburse-
ments. On the other hand, a price correction can impact
The above image clearly shows that India accounts for the value of gold and may lead to increased default rates
around 12% of the gold jewelry market in the world. The
of gold loans. Drawing on the increasing gold prices and
household investment in gold jewelry is driven by various
steep growth in gold loans, the RBI recently advised lend-
social and cultural factors. Indians often buy gold in the form ers to be cautious in lending against gold jewelry due to its
of jewelry and coins on auspicious occasions such as festi- speculative nature.
vals and special occasions such as weddings, anniversaries,
etc. As far as regional holding of gold in jewelry form is con- The RBI has advised lenders to refrain from overreliance
cerned, a December 2023 report by the World Gold Coun- on the valuation of the collateral alone; and expects lend-
cil suggests that South India alone accounts for about 40% ers to maintain high-quality credit assessment, and in other
of the gold jewelry holdings, followed by West India with words, lenders should assess the repayment capacity of bor-
25%, North India with 20%, and East India with 15%. The rowers. The RBI has also come up with draft guidelines in
gold jewelry holdings by the household are also attributed April 2025 to enhance transparency and mitigate risks as-
to gold being considered a better investment option,
sociated with advances against gold jewelry. This article
especially by the rural and semi-urban populations of the
discusses dynamics like banks' liquidity, the probable impact
country.
on capital, credit risk and provisioning, financial inclusion
and systemic risk concerns, and also provides strategic rec-
Gold as Collateral: Evolution of Gold ommendations for stakeholders involved.
Loans-
Due to gaps in credit access, gold jewelry has been widely Liquidity and Capital Considerations-
used by Indian households for fulfilling various financial The tenor of gold loans is capped at 12 months and since
needs, such as payment of education fees, medical emer- the borrower's repayment capacity is unlikely to change sig-
gencies, and other personal usage. From the 1950s to the nificantly over such a short period of time, gold loan con-
late 1990s, there was a dearth of formal lending channels sidered fully secured lending with lower risk, providing lend-
that explored gold jewelry as collateral for lending; there- ers an opportunity and a reliable source of funding Accord-
fore, several informal pawnshops or moneylenders existed ing to a CRISIL report, gold loan securitization in India
across the country to fulfill such needs. Since the year 1997, climbed to Rs. 5,390 in Q1 of FY 26, which accounts for

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