Amid growing concerns over recent volatility in gold prices, banks and non-banking financial companies (NBFCs) in the country are gradually tightening conditions for gold-backed loans. News agencies report, citing sources, that lenders have begun reassessing loan amounts and limits after the Reserve Bank of India (RBI) issued warnings about additional risks in gold loans.
As a result, financial institutions that previously offered loans up to 70-72 per cent of gold jewellery value are now reducing this ratio to 60-65 per cent. This means customers pledging the same amount of gold will now receive less money as loans compared to before.
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A senior official from a state-owned bank stated that the regulatory body issued this caution primarily due to fluctuations in international gold prices and volatility in the rupee's exchange rate. The RBI has advised lenders to be more cautious and strengthen risk analysis systems while recommending a slight reduction in loan approval pace.
The RBI's concern is that many customers are currently taking advantage of high gold prices to secure relatively large loans. If gold prices fall by even 10-15 per cent in the future due to international turmoil, the value of pledged jewellery could become less than the loan amount. In such cases, borrowers' interest in repaying loans may decline, potentially putting pressure on banks and financial institutions' assets.
Currently, gold prices in the MCX spot market are approximately ₹1.31 lakh per 10 grams, which has increased by about 20 per cent in the last three months and approximately 35 per cent in the last six months. Along with this continuous rise, the number of gold-backed loans has also increased. Statistics show that since March this year, the amount of loans taken against jewellery collateral has grown at an annual rate of 100 per cent. In October, the total amount of gold-backed loans reached ₹3.37 lakh crore. However, in April 2024, it was only ₹1.01 lakh crore. Gold loan amounts have been hitting new records for 18 consecutive months.
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Another concerning aspect is the age of borrowers. Customers aged 31-40 years are now taking approximately 40-45 per cent of total gold loans. Meanwhile, the amount of gold-backed loans taken by customers aged 21-30 years has doubled since the 2020-21 financial year. The average loan amount currently ranges between ₹80,000 to ₹1.5 lakh. However, according to relevant circles, a major portion of this money is being spent on consumption rather than asset creation, raising questions about the future repayment capacity of these loans.
