Gold Loans – There is a big risk brewing in gold loan books

Global spot gold prices have fallen by 31% from their January peak levels. During the same period, Indian gold prices fell by 17%, thanks to the support from a weaker rupee. However, gold loans could be sitting on a host of potential risks.

A growing fascination for gold loans

Gold loans have taken off in a big way in last 2 years. Traditionally, gold loans were the last resort for most households, when other options were exhausted. However, in the last few years, that has changed dramatically. Between FY23 and FY26, gold loans moved from being 18% of retail loans to around 41% of retail loans. That is huge and shows rising gold prices acting as an incentive for households to pledge their gold and take loans. They not only get the loan with limited documentation, but also the rising gold prices means that they can constantly get top-ups on their gold loans. Gold rallied 75% in 2025 alone.

What triggered the growth in gold loans?

There were several reasons that triggered the growth in gold loans. Indian households are estimated to be holding nearly 25,000 tonnes of gold. Most of that is in jewellery form. Indian families are sentimental about selling family gold and so gold loans offer a much better middle option. Also, the one-way spike in gold prices over the last 2 years has made gold loans less risky for the lenders and provides more top-ups to borrowers. The other factor is that credit score does not matter too much in case of gold loans and even people with low credit scores can still get a gold loan as it is a back-to-back funding. Above all, the process is simple, with disbursement in less than 24 hours.

Most gold loan borrowers ignore 3 basic risks

Gold loans look like a simple way to leverage, but there are 3 risks one must not forget. The 25% LTV is a safety net as it protects from a 30% fall in price. However, that limit is much lower when you consider that accrued interest is not factored into LTV calculations. Secondly, quite often, the market prices realized are lower than what the bank valuers estimate as Jewellers factor in conversion costs, hallmarking, cadmium content etc. Thirdly, gold price in rupees has fallen 17% while global gold has fallen 31%. That is because local gold gains from a weak rupee. If the rupee were to stabilize or harden from here, then the losses on your gold holdings could be much faster than anticipated.

India could be sitting on a ticking gold loan crisis

It may be too early for the Cassandras to come calling, but borrowers and banks must not ignore the inherent risks in gold loans. Today, the size of gold loans is at an unprecedented level. The gold loan portfolio of banks and NBFCs is estimated at ₹12 trillion. The unorganized lenders are about 70% of that number, so the total size of gold loan market could be closer to ₹20 trillion. It is estimated that the price hedge that lenders have is just about 7-8% in gold loans. Anything below that, leads to negative equity for lenders, and that is something RBI is always monitoring very closely. Looking at its size and penetration; a gold loan crisis is best averted early!