KOCHI: Gold-loan NBFCs are facing an inescapable pricing dilemma as their cost of borrowing rises on the one side, and with competition from banks offering substantially cheaper gold loans limiting NBFCs’ ability to increase their lending rates.
While rising bond yields and expected revisions in banks' lending rates are set to make funds costlier for gold loan companies, banks appear to have greater flexibility to maintain their existing gold-loan rates.
This could leave NBFCs caught between protecting their margins and retaining customers.
The concern has been flagged by Muthoot Finance, the country's largest gold-loan NBFC. At its second-quarter earnings call on October 31, the company's chief financial officer (CFO) pointed to the changing cost of money in the debt market.
The 10-year government security yield was approaching 7.5 per cent, very long-term bonds were yielding close to 8 per cent, while AAA-rated issuers were raising funds at around 8.5 per cent.
Muthoot's borrowing cost stood at approximately 8.6 per cent as of September 30, 2026.
Most borrowings linked to MCLR
Oommen K. Mammen, CFO, Muthoot Finance, said, "Most of the bank loans are linked to MCLR. Very few loans are linked to repo. It is negligible. Most of them are linked to MCLR."
He added that naturally the increase will happen to them also. “There will be an increase in cost of borrowing in the coming quarters, because the banks will be revising the MCLRs. Fresh rupee NCDs will be at higher rates too,” Mammen said.
The company's management has indicated that it may consider increasing lending rates by 50–100 basis points in response to higher funding costs. However, raising rates could prove difficult in a market where banks have become increasingly active in gold lending over the past few years.
Banks may not raise gold loan rates
Speaking to businessbenchmark.news, credit head of a bank said banks may not necessarily have to increase their gold-loan rates even in a rising interest-rate environment, as lending against gold already offers a comfortable margin with the loans backed by valuable collateral. This gives banks room to remain competitive on pricing, potentially widening the gap with specialist NBFCs.
The pricing difference is already significant. State Bank of India's (SBI) published rates for its 12-month bullet repayment gold loan and EMI/overdraft products were 9.15 per cent and 10.10 per cent, respectively, as of June 16, 2026. CSB Bank reported a mean interest rate of 12.51 per cent on gold loans disbursed during April-June 2026.
Muthoot, meanwhile, expects its gold-loan portfolio yield to settle around 18–18.5 per cent. This is a portfolio-level yield and not the interest rate charged under every individual loan scheme.
Rates vary across lenders and products depending on the loan amount, tenure and repayment arrangement.
The difference in funding structures is an important factor. Banks have access to a large deposit base, while gold-loan NBFCs depend substantially on bank borrowings and debt-market funding.
NBFCs also have to maintain extensive branch networks and specialised infrastructure for gold valuation, secure storage, collateral management and recovery.
For specialist lenders, the challenge is therefore twofold. They must contend with higher borrowing costs while competing with banks that may be able to maintain lower lending rates.
Absorbing the increase in funding costs could narrow their interest spreads, while raising rates could make their products less attractive to borrowers.
The pressure comes at a time when gold lending is expanding rapidly. Muthoot Finance's consolidated assets under management increased 42 per cent year-on-year to Rs2.09 lakh crore in the first half of FY27, while its consolidated gold-loan assets reached Rs1.93 lakh crore.
For the gold-loan NBFC industry, sustaining growth may not be the only challenge ahead. Protecting margins without losing customers to banks could become an increasingly difficult balancing act.
