Page 46 - Banking Finance February 2026

ARTICLE

about 11% of the total securitization volume in India. The loans had come to an end; however, during and after events
industry average of NPA is around 2-3%, which also makes like demonetization in 2016 and the COVID-19 pandemic
it an attractive option for funding. However, under the from 2019 to 2021, we saw further growth in gold loans,
Basel III framework, gold remains outside the high-quality as many people struggled to get through medical emergen-
liquid asset classification, and it cannot be used for main- cies and unexpected hospital bills.
taining a liquidity buffer.
During the period of pandemic from 2019 to 2021, gold
The recent RBI draft guidelines talk about following strict prices saw an extraordinary growth of around 38.32%. From
valuation process and Loan to Value (LTV) instructions, as the year 2022 onwards, many digital lenders and fintech
any breach in LTV for more than 30 days would attract an companies set up their shops to enjoy the rally of the ex-
additional 1% provisioning, and that could impact the capi- panding gold loan market. Now with advanced technolo-
tal adequacy for the banks and NBFCs. The recent RBI draft gies like artificial intelligence, the gold loan market is ex-
guidelines focus on ensuring capital adequacy by address- pected to grow further with better risk management prac-
ing concentration risk and following prudent LTV norms. tices and automated recovery tools. RBI reported to the
Finance Ministry, that the total gold loan outstanding by
Loan-to-Value Policies- Schedule Commercial Banks and NBFCs (Upper and Middle
layers) stood at Rs. 11.92 lacs Crores, as of March 2025. A
Loan-to-value ratios are central to the risk management
September 2024 press release by ICRA projects the gold
policy for gold loans. In June 2025, the RBI increased the
loan portfolio of Indian lenders to reach around Rs. 15 tril-
LTV for gold loans, to 85% and 80%, respectively, for loans lion by March 2027.
less than Rs 2.5 lacs and for loans in the range of Rs 2.5
lacs to Rs 5 lacs. For loans above Rs 5 lacs, the LTV has been
According to the Financial Stability Report of June 2025, by
capped at 75%; these updated instructions will be effective
the RBI, credit growth in the unsecured personal loan seg-
not later than April 1, 2026. Globally, LTV ratios vary based ment slowed down since September 2024. From a default
on specific instructions from regulators and government. risk perspective, gold loans have low historical delinquency
and are therefore considered safer among the personal seg-
In countries like Malaysia and Indonesia, the LTV ratio can ment loans. Gold loans are highly collateralized, and with
go up to 80%-90%, and some regulators restrict it to 50%- the easy e-auction process, banks and NBFCs find it reason-
60%. The recent directions of RBI aim at improving liquid- ably easy to recover loans, in case of any default.
ity position, especially among the small borrowers having a
ticket size of Rs 5 lacs and less. Now with the increase in NPA Trends and Regulatory Oversight-
gold prices and higher availability of LTV headroom, we will
As per Lok Sabha Unstarred Question No. 4021, answered
have to see if the RBI will bring any new changes to the
on August 18, 2025, the gross NPA percentage for banks
existing LTV to limit the risk of default in case of any large
correction in gold prices. and NBFCs (upper and middle layers) as of March 2025 is

Risk Exposure and Market Dynamics-
The increasing strain on the unsecured loan portfolio for in-
dividuals and the increased risk weightage from 100% to
125% for unsecured loans led the banks to explore lending
in the gold loan segment. According to a PwC study, Strik-
ing Gold: The Rise of India's Gold Loan Market, the growth
of gold loans between 2007 and 2012 has been attributed
to rising urbanization, a rising middle class population, and
rising gold prices. Post 2012, the decreasing gold prices put
pressures on gold loan portfolios of lenders across country,
which became a reason for increasing NPAs. By 2015, most
industry experts believed that the rally of growth of gold

40 | 2026 | FEBRUARY | BANKING FINANCE