INTRODUCTION

The gold lending industry in India is experiencing significant growth and is expected to grow at an even higher pace in the coming years. This growth is largely driven by increasing gold prices and growing consumer demand. The yellow metal has experienced various cycles of growth and stagnation and has reached an all-time high recently. Its compounded annual growth rate (CAGR) dropped to 9% in 2014 from 12% in 2009 and then rebounded to 12% in 2021.¹ This note delves into the current landscape of gold lending in India, key drivers behind its rapid growth, the challenges it faces and the expected way forward.

STATE OF THE INDUSTRY

The gold lending sector in India is still largely unorganised, but fintechs have helped introduce greater structure and efficiency to the industry. Today, the organised players account for a 37% share in the sector. It is noteworthy that the share of organised players in the market has increased from 26% in 2014 to 37% in 2024.² While the industry is growing across the nation, gold loans are more prevalent in the rural and semi-urban regions as compared to the urban regions, primarily due to low-to-no credit history of rural consumers, which drives their reliance on gold loans.

OPPORTUNITIES IN THE GOLD LENDING INDUSTRY 

Existing gold holdings with Indian households are estimated to be valued at approximately INR 126 lakh crores. The current market penetration of organised gold loans in India is 5.6%. Of this, the share of non-banking financial companies (“NBFCs”) constitutes around 61%.³ Additionally, the share of banks in the organised gold lending sector has increased from 36% in 2022 to 39% in 2024. Currently, most of the gold loans extended by banks are extended as a part of their priority sector lending (“PSL”) criteria (as agricultural loans or other priority sector targets). There is potential for NBFCs to leverage their strong presence in the market and partner with banks to extend gold loans for both PSL and non-PSL use cases.

In the first quarter of FY 2025, gold loans accounted for the largest share of the loans sanctioned by NBFCs⁴.  A recent data release by ICRA Limited expects gold loans by banks and NBFCs to exceed INR 10 trillion in the current financial year.⁵

FACTORS CONTRIBUTING TO THE GROWTH 

The recent upsurge in gold lending can be attributed to various reasons ranging from the shift in consumer perception, growth in the gold market, easier accessibility of loans and a directional shift of the regulatory landscape. Some of the major reasons behind the growth of the gold lending industry are summed up below:

1. The rising prices of gold globally enable customers to tap into comparatively higher amounts of credit. Given the loan-to-value (LTV) ratio requirement of up to 75%, the loan that could be granted against a piece of jewellery now is fairly higher than what the same piece of jewellery would have fetched last year.
2. There has been a drastic change in the perception of the customers with respect to gold loans. It is now looked at as a ‘flexible financial tool’ rather than a ‘measure of desperate times’. In times of need, customers want to continue to own the assets and typically prefer availing a loan against the gold rather than selling it.
3. Unsecured personal loans are the closest alternative to gold loans. However, after RBI’s recent impositions on lenders to increase the risk weights on unsecured personal loans and banks’ loans to NBFCs (other than priority sector loans and loans to housing finance companies⁶, the funding to NBFCs for extending unsecured personal loans has tightened, and the interest rates have increased. Notably, these impositions do not apply to gold loans. Accordingly, the industry seems to have found regulatory comfort in shifting to gold loans as an alternative as they would become relatively cheaper. Also, for the lenders, gold loans are a bet on the value of the gold that acts as a security rather than merely relying on the borrower’s credibility. 

ROADBLOCKS

While several factors contribute to the growth of the gold lending industry, certain roadblocks continue to hinder its progress. Below are some reasons why gold lending has not unlocked its full potential yet:

1. Availability of alternatives: While lenders have gradually shifted focus to gold loans owing to the changes in regulatory requirements with respect to capital adequacy, from a customer’s perspective, unsecured personal loans are still relatively easier to access. Therefore, a move to gold loans is expected to be slow. 
2. Need for a physical interaction: Like any secured lending product, the complete digitisation of a gold loan journey is almost impossible. Given the shift of customer preference to digital and hassle-free banking due to the rise of the tap-screen-and-order approach, gold lending is yet to evolve and make it easier for customers to access. Typically, in a gold loan process, while the loan application is online, various aspects of the lending journey are offline such as KYC, gold valuation, collection and pledge of the gold, execution of loan documentation, etc. Most of these aspects can be digitised using innovation, but valuation and collection of gold jewellery would still continue to be undertaken physically for obvious reasons. 
3. High Customer Acquisition Cost (CAC): Gold lending process involves several functions such as the gold valuation, setting up secured vaults for safekeeping the gold, setting up branches, etc., which result in relatively high CAC for the lender. While these are operational costs, the lenders factor these in while pricing their risk premiums. Resultantly, the annual percentage rate (APR) payable by the customer increases.
4. Risks arising from the nature of the product: Owing to its nature, gold lending has certain inherent risks. There is a risk of the cyclical fluctuations in the gold prices. Historically, gold loan portfolios have shown high defaults when the prices go down. While gold prices have been generally on the uprise, one cannot completely eradicate the risk of price fluctuations due to macroeconomic factors. Given that lenders typically sanction loans for 75% LTV, the regulatory limit of LTV breaches even in case of the slightest drop in the prices. Further, methods of gold evaluation are quite subjective and may not rule out the risk of fraud by customers using spurious gold jewellery. Another risk that gold lending faces is the risk of loss or theft of gold jewellery – which, in many cases, may involve employees. Of course, strong security measures may reduce this risk to some extent, but that comes at a cost. High CAC and other operational costs may make gold lending a low-return product for lenders.
5. Regulatory guardrails: Lenders tend to adopt innovative structures to increase their outreach, mitigate risks and manage operational costs. Some of the common examples are doorstep gold lending, involving third parties in gold valuation and storage, etc. However, given the risks involved, the regulator has been keeping a close eye on the sector. The recent regulatory actions against the gold lending players for various reasons such as stretching LTV by providing add-on loans, disbursing loans in cash beyond the allowed limits, deviations in gold valuation process, etc. demonstrate the regulator’s concern in this sector. Additionally, the regulator recently issued a notification⁷ highlighting its concerns on certain prevalent practices such as lack of systems to periodically monitor LTV limits, application of incorrect risk weights, use of top-up loans or renewals as an instrument for evergreening loans, etc.

WAY FORWARD

While various secured lending options exist, gold loans stand out as the most practical choice for both lenders and customers, primarily due to the ease of liquidating gold and the low risk of price depreciation. Although there is immense growth potential, gold lending has its own set of challenges, which could be reduced, if not eliminated, through innovation. For instance: 

1. Valuation discrepancies can be addressed using advanced equipment like karatmeters;
2. Video KYC can be implemented to streamline customer identification process; and
3. To enhance the safekeeping of gold, robust security measures such as access controls, secure entry systems, and real-time monitoring can be implemented.

Lenders have explored various innovative strategies to tackle the roadblocks. Some of them, such as door-to-door lending and outsourcing the valuation process, were not favorably looked at by the regulator. These concerns primarily emanate from the tendency of lenders to prioritise growth over responsible practices. At this stage, the industry would greatly benefit from innovation coupled with a nuanced regulatory approach that strikes a balance between fostering growth and ensuring prudence. 

[1]Source: Report by PWC on Striking gold: The rise of India’s gold loan market- August 2024

[2]ibid

[3]ibid

[4]Source: https://economictimes.indiatimes.com/markets/commodities/news/nbfcs-gave-out-most-loans-against-gold-in-q1/articleshow/113889796.cms?from=mdr

[5]Source: https://www.icra.in/CommonService/OpenMediaS3?Key=7ff642d7-e321-4652-b4e6-1bf0a56c7433#:~:text=ICRA%20forecasts%20the%20organised%20gold,15%20trillion%20by%20March%202027

[6]RBI circular on Regulatory measures towards consumer credit and bank credit to NBFCs dated November 16, 2023

[7]RBI circular on Gold loans – Irregular practices observed in grant of loans against pledge of gold ornaments and jewellery dated September 30, 2024