KOCHI: Indian banks and non-banking financial companies (NBFCs) are increasingly pivoting from unsecured lending to secured options, with gold loans emerging as a preferred choice.
This strategic shift is influenced by regulatory measures, risk mitigation strategies, and changing borrower behaviors.
Regulatory push
In November 2023, the Reserve Bank of India (RBI) increased the risk weight for unsecured personal loans by 25 percentage points to 125 per cent. This move made unsecured lending more capital-intensive, prompting banks to reassess their lending portfolios.
Consequently, growth in unsecured loan segments has decelerated. For instance, personal loans grew by only 5-6 per cent in the period leading up to December 2024, compared with 16.5 per cent in the previous year.
Surge in Gold Loan Portfolios
Amidst the tightening of unsecured credit, gold loans have witnessed remarkable growth. Gold loans portfolios of banks surged by 71.3 per cent year-on-year reaching Rs1.72 trillion by December 2024.
This surge is attributed to several factors:
Risk Mitigation: Gold loans are secured by physical collateral, reducing the risk of default.
Capital Efficiency: They require lower capital provisioning compared with unsecured loans.
High Demand: Elevated gold prices have increased the value of collateral, allowing borrowers to access higher loan amounts.
Banks Embracing Gold Loans
Several financial institutions have reported significant growth in their gold loan portfolios:
Muthoot Finance: Reported a 34 per cent year-on-year increase in gold loans under management, reaching Rs92,963.6 crore by Q3 FY25 .
Manappuram Finance: Saw a nearly 19 per cent growth, with the gold loan portfolio at Rs23,700 crore in the same period
AU Small Finance Bank: Experienced an 11 per cent quarter-on-quarter growth in its gold loan segment during Q2 FY25, aiming for a 40 per cent annualized growth rate.
RBI’s enhanced oversight
The RBI has proposed stricter regulations for gold loans to ensure financial stability and curb unethical practices. Key proposals include:
Standardised underwriting: Implementing uniform procedures for assessing gold purity and valuation.
Loan-to-Value Ratio: Enforcing a 75 per cent cap to prevent over-leveraging.
Monitoring fund usage: Ensuring that borrowed funds are used for declared purposes .
