Glitter of gold loans

Increasing household debt needs careful examination

A report in this newspaper last week underscored early signs of stress in the rapidly growing gold-loan segment. Although the stress doesn’t pose a systemic risk, the underlying dynamics of this segment and the broader signals need careful examination. In principle, a gold loan is an excellent proposition. Borrowers offer their gold holding as collateral, which gives lenders the confidence to lend even to those who would otherwise not have been able to borrow from the formal sector. Lenders can sell the pledged gold if a borrower is unable to repay the loan. Nevertheless, a large number of defaults can create problems for lenders, depending on gold prices and other terms and conditions. 

As the chief executive of a prominent non-banking financial company (NBFC) told this newspaper, between 15 and 23 per cent of the gross gold loans at an aggregate level last financial year went to borrowers who were overdue for more than 90 days on other outstanding loans. This effectively means that nearly one in every four to five borrowers took a gold loan to repay other loans. Thus, the new loan is unlikely to improve the borrower’s ability to repay. This is important from both lenders’ and a macro standpoint. Analysts note that gold loans have become the second-largest retail lending category after home loans. According to the Reserve Bank of India (RBI) data, the outstanding gold loans for banks increased by over 80 per cent, year-on-year, to about ₹5.6 trillion as of August 31. NBFCs have also witnessed sharp increases and have gold-loan books worth about ₹3.6 trillion. 

While banks and NBFCs will possibly adjust their lending practices to deal with delinquent borrowers, it appears that some households are becoming more indebted. Notably, household debt in India is growing. The RBI’s last Financial Stability Report (June 2026) showed that household debt at the end of September 2025 was worth 45.5 per cent of gross domestic product (GDP). The level was at 37.6 per cent at the end of March 2023. Although India’s household debt is lower than that of some of the other emerging economies, such as China (59 per cent) and Malaysia (69.9 per cent), it is higher than that of Brazil (36.7 per cent) and South Africa (33.6 per cent), and is increasing. It is worth noting that consumption-related loans are the main driver of household borrowing in India. The share of loans for consumption purposes was at about 50 per cent at the end of March 2026. 

Overall, according to the RBI’s assessment, even though household borrowing is rising, the share of higher-rated borrowers has improved. While the aggregate level of household debt may not look high compared with many other countries, the increase in consumption loans needs attention. The share of housing loans in household borrowing is declining. On the contrary, household debt in the United States, for example, is overwhelmingly dominated by housing loans. The increasing household borrowing for consumption could mean that credit is now available more easily and households are frontloading consumption. From the banking and regulation perspective, this may not be a problem, given that asset quality is improving. However, the debt-servicing burden on households could affect overall consumption and growth in the medium term. This could also have repercussions for household savings, with implications for overall investment in the economy. Therefore, the increase in household debt and its composition must be examined carefully.