MUMBAI: Gold loan, which dazzled as the fastest-growing consumer credit segment in FY25, may soon face a regulatory reality check that could alter their trajectory – especially for banks.
The Reserve Bank of India’s (RBI) proposed guidelines, released in April as a draft, seek to standardise how all regulated entities – including banks and NBFCs – compute loan-to-value (LTV) ratios on gold loan.
While the move is aimed at curbing aggressive lending practices, it has prompted a quiet rethink among lenders, particularly banks that had ramped up their gold loan portfolios over the past year.
The Kerala-based banks such as CSB Bank, South Indian Bank (SIB) and Federal Bank have in the past few years built a strong gold loan book with the former’s gold loan book has sized up to more than 45 per cent of the bank’s total loans.
“Given the draft’s stipulations, lenders may have to tighten how they assess the value of pledged gold and recalibrate disbursements. That could not only slow growth but also raise compliance costs,” said a senior executive at a private bank. “It’s too early to say whether the economics of gold lending will remain as attractive.”
A Crisil Ratings note has already flagged the concern. “If implemented in current form, the directions on LTV computation and breaches thereof can impact the growth prospects of gold-loan NBFCs as they will have to recalibrate their disbursement values,” said Malvika Bhotika, director at the agency.
Rapid rise
The numbers tell a story of frenzied expansion. In FY25 alone, loans against gold jewellery are estimated to have grown by over 50 per cent, with banks recording a staggering 104 per cent rise. Aggressive pricing, higher ticket sizes, and strategic cross-selling of other financial products made gold lending a key pillar of retail growth strategies for many banks.
But the same playbook may now need rewriting.
The RBI wants to close the gap in risk practices between banks and NBFCs in the gold loan segment. For banks, which typically operate at lower LTVs, the new framework may not hurt as much.
“But it could prompt them to reassess whether the cost of compliance and systemic oversight is worth the margins,” said a former banking regulator.
NBFCs vs banks
NBFCs such as Muthoot Finance and Manappuram Finance have long dominated this segment, aided by deep rural networks, operational nimbleness, and quick disbursal cycles.
Banks caught up during and after the pandemic, capitalising on gold’s rising value and customers’ preference for short-tenure secured loans.
However, for NBFCs, the proposed cap on how gold value is computed – and stricter actions on LTV breaches – could blunt their competitive edge, especially when compared with banks that benefit from lower cost of funds and regulatory forbearance.
“The proposed rules could disproportionately affect NBFCs. Their business model depends on speed and flexibility. Tighter rules could not only reduce the eligible loan amount but also increase operational friction,” said a sector analyst.
A rebalancing ahead?
The bigger question now is whether banks, sensing regulatory tightening and thinning margins, will continue to aggressively chase gold-backed loans or quietly rebalance towards other segments such as personal or SME loans.
One thing is clear: the regulatory shine around gold loans is no longer guaranteed. As Crisil notes, “The final impact on credit profiles of rated entities will depend on the eventual directions.”
For banks and NBFCs alike, the glitter of gold may soon come with a caveat.
