Why gold loans are rising so rapidly in India and why the RBI is concerned about it.

What’s the news?

During April-June 2024, the total amount of gold loans sanctioned by Non-Banking Financial Companies (NBFCs) increased 26% year-on-year to ₹79,218 crores, the highest among all loan categories.

Why are gold loans growing so fast? Let’s break it down.

Three major reasons gold loans are in focus:

1. Convenience and Cost:
Gold loans offer a relatively hassle-free borrowing experience. With minimal paperwork, quick processing, and even doorstep service.

2. Rising Gold Prices:
With gold prices rising to record highs in 2024, people are eager to unlock the value of their gold holdings, especially attractive as gold loans offer.

3. Highest Return on Investment (ROI):
Gold loans provide the highest ROI to NBFCs as they do not need to dig too deeply into a borrower’s financial history because the gold stays with the NBFCs.

So it’s a win-win for both parties. Because it is a secured loan (i.e. you pledge your gold as security for a loan), NBFCs charge relatively lower interest for gold loans compared to other types of loans.

As a result, over the last two years, the amount of gold loans sanctioned by NBFCs has nearly doubled from ₹39,687 crores to ₹79,218 crores.

To distribute more loans, some NBFCs also carried out irregular practices drawing RBI’s attention. Recently, RBI raised some concerns over the practices followed by some NBFCs.

Here’s what RBI has highlighted:

1. Improper Valuation of Gold:
Some lenders were valuing gold incorrectly, creating potential risks for both borrowers and themselves. This includes instances of gold being valued without the customer’s presence.

2. Breaches of LTV Ratios:
If gold worth ₹1 lakh is pledged for a loan of ₹75,000, the Loan-To-Value (LTV) is 75%. Lenders continued offering loans at a high LTV ratio of up to 90% with the limit being 75%, raising default risks.

3. FinTech Partnerships:
Weak governance in partnerships with FinTech companies for sourcing gold loans led to concerns over due diligence and the potential for lapses in loan-sanctioning practices.

To conclude

If you are someone considering getting a gold loan, taking advantage of lower interest rates, and easy access to funds, do evaluate the lender’s practices, ensure the gold is properly valued, and check that the Loan-to-Value (LTV) ratio stays within RBI’s guidelines to avoid any future risks.