KOCHI: India’s financial sector has been riding an unprecedented gold loan boom, with both banks and Non-Banking Financial Companies (NBFCs) aggressively expanding their portfolios.
The allure is clear – gold loans are quick, secure, and lucrative. However, the Reserve Bank of India (RBI) is sounding alarm bells over mounting risks, leading to an imminent regulatory clampdown that could make life difficult for financial institutions profiting from this segment.
According to sources close to the central bank, certain banks – especially in Kerala – have become excessively dependent on gold loans, with their exposure nearing unsustainable levels.
The RBI, alarmed by unchecked growth and unethical practices, is preparing to tighten underwriting norms, enforce stricter monitoring of end-use, and curb questionable loan renewals.
As the regulator moves to rein in the gold loan frenzy, banks and NBFCs may be forced to reinvent their strategies – or risk severe financial and regulatory repercussions.
Red flags in gold loan practices
The gold loan segment has expanded at a staggering pace, with banks’ gold loan books growing by 50 per cent since September 2024, far outpacing overall credit growth. NBFCs have also seen record expansions, leveraging rising gold prices to drive aggressive lending.
This rapid growth, however, has raised concerns within the RBI, which fears that some borrowers are misusing gold loan funds – especially by diverting them into the stock markets.
 Given that gold loan often carries higher interest rates than secured loans, using them for speculative investments poses a serious financial risk.
Lapses in loan sourcing, appraisal, and valuation
RBI audits over the last 12-16 months have uncovered irregularities in gold loan sourcing, collateral valuation, and loan approval processes. In some cases, Fintech agents, rather than banks, were handling crucial steps like gold collection, weighing, and storage, raising compliance and security concerns.
In certain cases, gold auctions were said to be conducted without informing defaulting borrowers, leading to potential legal and reputational risks for lenders.
There were complaints from some quarterss that lenders were not following standardised appraisal methods, creating discrepancies in gold valuation.
What’s Changing?
The RBI is expected to introduce a host of new measures to regulate the sector:
Mandatory servicing of interest on gold loans may be introduced – Borrowers may be required to pay interest regularly rather than relying on book adjustments during renewals.
No more automatic loan rollovers- Financial institutions will have to demand fresh inflows instead of simply renewing loans through book adjustments.
Stronger borrower scrutiny – Banks and NBFCs may be asked to bolster background checks and verify actual ownership of pledged gold.
Uniform auction rules – The regulator is expected to enforce stricter borrower notification norms before lenders can auction gold.
Tough times ahead
If these stricter rules are implemented, banks and NBFCs will struggle to maintain current levels of profitability in the gold loan segment. Loan growth is bound to slow, as institutions will no longer be able to aggressively renew loans or offer easy rollovers.
Higher compliance costs – Ensuring borrower scrutiny, monitoring end-use, and enforcing new regulations will increase operational burdens for these financial institutions.
Liquidity impact – Since many lenders rely on quick gold loan disbursements and rollovers to maintain cash flows, new regulations could tighten liquidity in the segment.
For institutions that have bet big on gold loans, this could mean a forced strategy reset. For borrowers, however, the RBI’s move could bring much-needed transparency and consumer protection, preventing predatory lending and unethical auction practices.
The golden gamble is over
India’s gold loan industry, once a safe haven for easy credit, is now under intense regulatory scrutiny. The RBI’s impending crackdown is set to disrupt lenders’ business models, forcing them to adopt stricter lending standards and greater transparency.
Banks and NBFCs that have ridden the gold wave may now face the heat, as the regulator moves to ensure financial stability. The days of unchecked gold lending, easy rollovers, and speculative borrowing are numbered- and for lenders, it’s time to brace for impact.
