India’s gold loan market is emerging as the fastest-growing segment in retail lending, fuelled by record-high gold prices, rising household liquidity needs and tighter regulations on unsecured loans. As borrowers increasingly pledge their gold to access quick credit, banks and non-banking finance companies (NBFCs) are stepping up their focus on the segment, driving strong loan growth despite a broader moderation in retail credit. The banks and non-banking financial institutions are turning towards gold loans to keep their lending business going forward since the demand for personal loans and consumer lending is falling.
As per industry insiders, gold loans are a lucrative opportunity both for borrowers and lenders. Pledging of jewellery gives instant cash without liquidating family assets for borrowers, while for the lenders, the loan backed by the collateral reduces the risk associated with unsecured retail loans.
Rising Gold Prices Increase Borrowing Capacity
Gold prices have hovered close to their all-time highs due to various global geopolitical risks, gold purchases by central banks and falling expectations of interest rates globally. The increase in the valuation of pledged jewellery has increased the borrowing capabilities of customers and thus created new demand for gold loans. It is estimated that India’s organised market of gold loans has been growing at a rate of over 25 per cent annually, outperforming bank credit growth that has slowed down to about 10-12 per cent.
It is estimated that there are over 25,000 tonnes of privately owned gold in India, which makes India one of the largest hoards of personal wealth in the world and yet mostly untapped. Another factor that has driven banks to secure gold loans is the strict regulations from the Reserve Bank of India on unsecured loans in the last year. Gold loans provide fast processing, short tenors and relatively low interest rates, making them suitable for small businesses, traders, farmers and salaried borrowers facing temporary cash needs.
Banks And NBFCs Intensify Competition
The intensity of competition in this segment is increasing as banks from both the public and private sectors are building their portfolios of gold loans while non-banking financial companies specialising in gold lending are continuing to expand their branch network in semi-urban and rural areas. According to economists, the above trend is a result of changing borrowing habits rather than purely due to financial difficulty.
Gold loans are expected to continue their impressive performance in the next few quarters. In spite of the regulatory pressure regarding the prudence of the loan-to-value ratio, the combination of higher gold prices, an increasing number of lending avenues, and continued demand is expected to ensure robust growth for this segment.