RBI Steps Up Watch on Banks’ Gold Loan Books — What It Signals for the Sector
A sharp correction in gold prices has put India’s fast-growing gold loan industry under the regulatory spotlight, with the Reserve Bank of India (RBI) said to be closely monitoring lenders’ exposure and risk positions. The move comes after gold prices fell about 15 percent from recent peaks, raising questions about collateral value, loan-to-value ratios and potential stress in gold-backed lending.
After touching record highs, gold prices corrected sharply in a matter of days, falling from around ₹1.83 lakh per 10 grams to nearly ₹1.54 lakh per 10 grams. Although prices showed some recovery in subsequent sessions, the volatility has drawn regulatory attention because gold loans are directly linked to the value of the underlying collateral.
For a sector that has expanded rapidly on the back of rising gold prices, this correction represents a real-time stress test.
Why RBI Is Watching Gold Loan Portfolios More Closely
The RBI’s concern is rooted in two key trends:
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Rapid expansion in gold loan books
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Growth driven more by price appreciation than by higher gold tonnage pledged
When gold prices rise, the value of collateral increases, allowing borrowers to take larger loans against the same quantity of gold. But when prices fall, the reverse happens — collateral cover shrinks, and lenders may need borrowers to top up or repay part of the loan.
Another area of concern is the shift by some lenders from unsecured retail loans to gold-backed loans, especially in small-ticket segments. While gold loans are considered safer than unsecured credit, they are still vulnerable to commodity price cycles.
A senior NBFC executive said,
“We are at the peak of the gold loans business. Any lending business is cyclical, and when you lend against a commodity, the cyclicality tends to be higher.”
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Explosive Growth in Gold Loan Books Raises Systemic Questions
Recent numbers highlight how quickly the segment has grown.
Muthoot Finance reported gold assets under management of about ₹1.25 lakh crore in the second quarter, showing strong year-on-year growth. Manappuram Finance reported gold AUM of nearly ₹38,754 crore in the third quarter, also posting robust annual growth.
At the system level, bank loans against gold jewellery have surged to around ₹3.83 lakh crore, marking an approximate 86 percent rise during the financial year, according to RBI data on sectoral credit deployment.
Such rapid expansion naturally attracts regulatory scrutiny, particularly when it coincides with volatile commodity prices.
Loan-to-Value Rules Become Crucial in a Falling Market
Gold loans are governed by loan-to-value (LTV) norms, which determine how much can be lent against the value of pledged gold.
Typically:
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Smaller loans can have LTV up to around 85%
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Larger loans may be capped near 75%
When gold prices fall, effective LTV rises unless borrowers repay or provide additional collateral. This can push loans closer to regulatory limits.
Sources say top-up loans against the same collateral had increased over the past year, especially in small-ticket segments. In a rising gold market, this practice appears manageable, but in a falling market it can magnify risk.
Delinquencies and Auctions Under Watch
One key question for the RBI is whether price volatility will translate into higher delinquencies. If borrowers fail to meet margin calls or part-repayment requirements, lenders may have to auction pledged gold.
A source familiar with the situation said,
“Whether delinquencies and auctions of gold are piling up is something that will be closely monitored after the recent price moves.”
While there is no sign yet of systemic stress, regulators often act early to prevent risks from snowballing.
Here’s What Happened Today and Why Traders Reacted
Gold loan-focused NBFC stocks have already felt the impact. Shares of Muthoot Finance and Manappuram Finance have come under pressure in recent sessions, declining in the last few trading days as investors priced in potential risk.
Traders reacted to:
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Sharp correction in gold prices
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Fear of higher LTV stress
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Possibility of rising auctions
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Regulatory monitoring signals
Even the perception of tighter oversight can weigh on sentiment in rate-sensitive and collateral-linked lenders.
What This Means for Investors and Borrowers
For equity investors, the key takeaway is that gold loan NBFCs remain profitable but are not immune to commodity cycles. Their risk profile rises when gold prices fall sharply.
Portfolio implications:
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Expect higher volatility in gold loan stocks
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Watch asset quality trends and auction data
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Monitor RBI commentary and guidelines
For borrowers, falling gold prices can reduce available credit limits and may require partial repayment to maintain LTV norms.
A Stress Test for a Fast-Growing Segment
India’s gold loan market has grown rapidly because it offers quick, secured credit and taps into households’ large gold holdings. However, the latest price correction is a reminder that even secured lending carries risk when linked to volatile assets.
If gold prices stabilise, the sector could absorb the shock comfortably. But if volatility persists, lenders may need to tighten underwriting and monitoring.
For now, the RBI’s close watch signals caution, not panic. Yet it also underlines an important lesson for investors — when growth is driven partly by rising asset prices, a reversal can test the system’s resilience.
The coming months will show whether this is a temporary tremor or the start of a more cautious phase for gold-backed lending.
