Gold Loan Demand Surges as Banks Compete with NBFCs
MUMBAI – Gold loans are experiencing rapid growth as both banks and non-bank financial companies (NBFCs) aggressively pursue the market,fueled by rising gold prices and recent regulatory changes. Traditionally dominated by NBFCs, the sector is now seeing notable participation from large public sector banks like State Bank of india (SBI) and Bank of Baroda (BoB).
The increase in lending is supported by a June decision from the Reserve Bank of India (RBI) to raise the loan-to-value ratio, allowing lenders to offer more credit against gold holdings. “With the recent circular on gold, the gold loan business grew quite strongly in june, and we will see the full impact of that playing through from this quarter onwards,” stated Venkatraman Venkateswaran, executive director and chief financial officer, Federal Bank, during an August 2nd analyst call. Federal Bank’s gold loan portfolio reached ₹31,262 crore in Q1 FY26, a 14% year-over-year increase.
As of September 2024, NBFCs held ₹1.7 trillion in retail gold loans, slightly exceeding the ₹1.5 trillion held by banks,according to RBI data. While bank loan data is released monthly, comparable NBFC figures are published annually in RBI’s December report on banking trends.
Industry experts attribute the surge to a broader shift towards secured lending. “In the incremental credit flow of credit,gold loans have surpassed housing loans. One reason for the surge in gold loans is rising gold prices and more lenders are shifting to secured loans,” explained Anil Gupta, senior vice-president at rating agency Icra.
However, gold loans present operational challenges. Gupta noted, “gold loan is an operationally intensive business to run. There are strict regulations on how the branch has to be secured with a vault,valuation of gold and auctions,among others.”
Regulatory scrutiny is also impacting the market. The RBI is tightening rules regarding the classification of gold loans as agricultural loans, which previously allowed for higher lending percentages (up to 85% versus 75% for retail customers). “There has been some amount of regulatory change that says banks cannot arbitrarily classify regular gold loans as agricultural gold loans,” said Gala of India Ratings. “Some banks were classifying gold loans as agri gold loans, but the regulator is aligning assessment and classification methodology to remove the arbitrage. This has led to reclassification of these loans as regular gold loans, adding to the volume.”