When gold loses its glitter

The regulatory framework effective April 2026 has created the foundation for mitigating risks in gold loans but more needs to be done

Pliny the Elder, the Roman author, naturalist, scientist, military commander and fleet admiral, called India "the sink of the world's gold" in his Naturalis Historia, lamenting a catastrophic trade deficit and the drain of wealth from the Roman Empire to India. Elite Romans had developed an insatiable appetite for Indian luxury goods—black pepper, exotic spices, fine muslin, pearls, ivory, and gemstones. As Roman merchants couldn’t barter goods of equal value, they paid for these luxury shipments using pure gold and silver coins. Every year, India drained the Roman Empire of at least 50 million sestertii. (The sestertius was the core, everyday silver and bronze coin used throughout the Roman Republic and early Roman Empire.)

 

What we are witnessing today is the reverse of what Pliny wrote 1,949 years ago. India doesn’t earn gold: It imports it. As the second-largest gold importer after China, India pays the price as the value of gold imports feeds into its merchandise trade deficit. (To be sure, gold imports dropped 81.27 per cent year-on-year to $1.8 billion in September 2026—a decline for a second straight month after the government raised the import duty on precious metals from 6 per cent to 15 per cent in May.)

 

Indian households roughly hold 28,000 tonnes of gold worth Rs 380-390 trillion. Yet, only about 8 per cent of all its lendable value (assuming a loan to value or LTV of 60 per cent) has been monetised through organised lenders.

 

The scene is changing. The gold loan market—spanning banks and non-banking financial companies (NBFCs)—expanded from Rs 5.5 trillion in March 2022 to Rs 18.6 trillion by March 2026. By June 2026,  outstanding gold loans reached Rs 21.7 trillion, up 62 per cent year-on-year.

 

Reserve Bank of India (RBI) data on the sectoral deployment of outstanding credit by NBFCs shows year-on-year overall loan growth was 15.8 per cent in August 2026, but loans against gold jewellery grew 69.1 per cent. During the same period, the banking sector's loan book grew 19.1 per cent. What about loans against gold jewellery? Hold your breath: 83.2 per cent. If you think this is too much, a year ago (between August 2024 and August 2025), it was 130.2 per cent! And this doesn’t give the full picture, as gold loans also form a part of banks’ agricultural lending.

 

In the personal loan space, loans against gold jewellery are the third-largest segment for banks, after home and vehicle loans. The pecking order is the same for NBFCs. Banks dominate the landscape with an approximate 78 per cent market share, driven primarily by agriculture loans collateralised by gold.

 

For generations, an Indian family pledged its jewellery only when every other door had closed. The trip to the pawnbroker was made quietly, often after dusk. That social stigma has largely vanished.

 

Four distinct factors drive this rapid expansion.

 

First and foremost is the surge in gold prices. Between FY20 and FY25, the actual tonnage of gold pledged grew at a modest 1.7 per cent annually, while the average ticket size more than doubled. The recent portfolio growth has been almost entirely value-led.

 

Second, the RBI's decision to raise risk weights on unsecured personal credit and credit cards in November 2023 prompted both lenders and borrowers to pivot towards secured products. For salaried borrowers, bank gold loans can be roughly three percentage points cheaper than personal loans; for small businesses needing immediate working capital, funds are disbursed in minutes without checking balance sheets and cash flows. They are the most direct beneficiaries, as a gold loan can provide working capital at short notice, which comes in handy during a production or trading cycle.

 

Microfinance customers are also lapping up gold loans. Among microfinance customers with exposures to at least two retail-credit products, gold loans have the largest share at 18 per cent. The size of an average gold loan is about Rs1.9 lakh—a little more than three times the Rs 60,000 average ticket size for a microfinance loan.

 

Third, unlike property, gold is a relatively liquid collateral. In case of a default, the lender can recover the money fast by selling the collateral.

 

Finally, the regulatory adjustments effective April 2026, which raised the LTV ceiling for small gold loans up to Rs 2.5 lakh from 75 per cent to 85 per cent, have acted as a booster. It’s a win-win for both sides. For borrowers, the cost of the loan is around 3 to 6 percentage points lower than unsecured credit. For lenders, the loan is backed by collateral, so there is minimal risk (unless the gold pledged lacks purity).

 

Southern states are at the centre of the market. Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, and Telangana together account for nearly 69 per cent of gold loan originations, according to a recent Kotak Mutual Fund research report. Growth is also beginning to spread beyond this base. Uttar Pradesh recorded the highest origination growth at 75 per cent, followed by Delhi at 70 per cent, while Madhya Pradesh, Rajasthan, and Gujarat each grew by more than 50 per cent recently. Markets with lower penetration can now play a larger role in the next leg of growth.

 

But risks are brewing. At least two NBFCs—one very large and the other not so large—have flagged them recently.

 

Reliance on asset inflation creates inherent vulnerabilities. A market propelled by rising asset values faces immediate contraction when underlying prices fall. Following a global peak of approximately $5,595 per ounce on January 29, international gold prices dropped nearly 27 per cent by late June. A weaker rupee and the higher import duty have partially cushioned the domestic impact; Indian gold prices still declined roughly 17 per cent from the peak.

 

Lenders frequently cite average system-wide LTV ratios below 60 per cent but the average conceals tail-risk exposures. The new norms require the LTV of such loans to be calculated on the total amount payable at maturity, but a sharp fall in gold prices can still wipe out the cushion. When defaults occur, realisation values at auctions frequently fall short of outstanding book values. Most importantly, an 85 per cent ceiling on smaller loans narrows the safety buffer for vulnerable borrowers.

 

Beyond balance sheet mechanics, rising volumes raise broader questions about household balance sheets. Gold loans currently account for roughly 16 per cent of total consumption borrowing. While a portion represents debt consolidation from high-cost personal credit, another fraction reflects households pledging personal assets to cover structural income deficits. Unlike unsecured credit defaults, failing to service a gold loan results in the loss of family assets.

 

Between 15 per cent and 23 per cent of gross loan disbursements across the industry in FY2025–26 went to borrowers who were more than 90 days overdue on at least one outstanding loan, as the CEO of one NBFC pointed out, estimating the value of such disbursements at Rs 4.7 trillion—"a shockingly high number." A loan that is not serviced in 90 days is a bad loan.

 

Operational practices across priority-sector agricultural gold loans also warrant closer scrutiny. Banks often use jewellery-backed loans to fulfil mandated agricultural target quotas. Persistent operational gaps suggest significant leakage towards non-agricultural commercial borrowers. Efforts by the regulator to tighten end-use compliance in draft guidelines on gold loans encountered political pushback, leading to diluted final frameworks.

 

The foundation has been laid by the regulatory framework effective April 2026, which caps bullet loans at 12 months and curbs perpetual rollovers, mandates formal credit assessments for exposures above Rs2.5 lakh, standardises assaying protocols, and imposes daily penalty fees for delayed collateral returns by lenders. But more needs to be done.

 

Lenders must proactively stress-test portfolios against severe price declines while maintaining actual operational LTVs comfortably below statutory caps. The RBI, for its part, can consider dynamic LTV limits during volatile market cycles, a lower LTV ceiling for small loans, and nudging lenders towards equated monthly instalments that amortise the principal over time.