Page 48 - Banking Finance February 2026

ARTICLE

ers are also able to access credit easily as compared to then there is a distinct possibility that, this event can im-
other unsecured individual and business loans. The RBI also pact the banks that have funded those NBFCs for on-lend-
allows classification of agriculture gold loans as priority sec- ing, and their capital might be adversely impacted. In 2024,
tor loans, provided banks are able to track the end use of RBI, after finding irregularities with the process of gold
funds. The same stands true for other global markets. loans, gave all lenders a time of three months to review
their policies of gold loans and take corrective actions to
As per a report of the World Gold Council, gold as collat- avoid any supervisory action from RBI.
eral for loans has the potential to bring unbanked people
into the formal economy, and the report suggested that As previously stated, banks and NBFCs have been indirectly
lower-income ASEAN countries can benefit greatly from this
pushed into increasing their funding towards secured lend-
model. And with the rising gold prices, credit limits for mar- ing, like advances against gold jewelry. However, with such
ginal farmers and many small individually owned businesses
will also increase, which will further support financial inclu- a steep rise in gold prices, we may see RBI introducing tools
sion and liquidity position of rural India. like stress testing to monitor risk and to ensure sustainable
growth.
Gold loan is one such product that can both strengthen
consumption and fund income-generating activities, and International Practices-
banks and NBFCs are indirectly guided by regulatory guide- Globally, formal gold loan markets vary widely. In the case
lines to focus more on diverting gold loans into genuine of advanced economies, banks don't generally accept gold
income-generating advances. However, as stated earlier, coins or jewelry as collateral; however, in countries situated
the growth needs to be balanced with prudence so as to in the regions of South Asia, Southeast Asia, and the Middle
avoid any operational risk.
East, similar practices, like in India, are found. Countries like
Malaysia and Singapore have proper frameworks for licensed
Systemic Risk Considerations- pawnbrokers, which decide the LTV and auction rules. In
Gold loans are mostly household credit, and their exposure Pakistan, many microfinance banks offer gold loans; however,
is interconnected with other banking exposures, but a large they keep an overall cap of 35% on a bank's portfolio.
correction in gold price may affect many banks at once.
Hypothetically, a correction of more than 25% could push However, most developed economies treat gold as a re-
many loans on the verge of default. The present level of serve commodity, and their banks have not commoditized
securitization of gold loans is not like the home loans or
gold as a product, though informal pawnbrokers exist in
other mortgage loans, so the problem won't spread too far,
many countries. If we compare the global practices with
like it did for US lenders in 2008; therefore, the contagion that of India's, then we will find that India's gold loan mar-
risk is limited.
ket is a unique example, especially when it comes to for-
mal and regulated lending. As far as the regulations are
However, if a few big NBFCs report defaults in gold loans,
concerned, RBI has made it clear, with its Scale Based Regu-
lation Framework, that the earlier difference in oversight
between banks and NBFCs will keep getting smaller. How-
ever, international practices are often similar to that of
India. Most central banks, which allow their banking and
non-banking corporations to deal in gold loans, often stress
on maintenance of a predefined LTV ratio, standardized
valuation, and transparency in auction and documentation.

Conclusion: Outlook and Recommenda-
tions

The sharp rise in gold price has again reinforced the signifi-

42 | 2026 | FEBRUARY | BANKING FINANCE