With gold prices reaching record high levels, demand for gold loans from banks has significantly risen in recent months. Loans against gold jewellery increased nearly 40% in July and 31% in June this year, compared with 16% and 19% in the same months last year, as per the Reserve Bank of India (RBI) data.
Similarly, gold loans rose by 30% in May this year, compared to 15% in the same month last year. Gold loan outstanding has surged to Rs 1.32 lakh crore as of the end of July, from Rs 95,344 crore in the year-ago period, showed RBI data.
Bankers say higher prices encourage people to opt for gold loans as the loan amount gets bigger.
“When the price of gold increases, customers are able to unlock more value from the same amount of gold jewellery they pledge,” said the head of consumer banking of a private bank. “With the festive season in full swing, we are witnessing even greater demand as people look for convenient and quick financing solutions to cover various seasonal expenditures, whether it’s for purchases, celebrations or personal needs. This trend is likely to continue as rising gold prices as well as festive spending boost the appeal of gold loans.”
The Reserve Bank of India mandates a maximum loan-to-value (LTV) ratio of 75% for gold loans offered by banks and non-banking financial companies (NBFCs). This means a person can borrow up to Rs 75,000 against gold valued at Rs 1 lakh.
Prices of gold have hit all-time highs this month and are trading at around Rs 75,750 per 10 gram, driven mainly by the 50-bps cut in interest rates announced by the US Federal Reserve and expectations of more cuts by the American central bank.
Besides, geopolitical tensions arising from the Israel-Hezbollah conflict and the ongoing Russia-Ukraine war have also increased the demand for gold. Another factor which has been supporting gold prices for the past many months is the continued buying by central banks across the globe.
“Unlike personal loans, which require extensive credit checks and income verification, gold loans are fast, convenient and come with minimal paperwork,” said a senior official of a public sector bank. “For banks, gold loans are a safer option, as the risk of non-performing assets is significantly lower due to the secured nature of the collateral.”
According to a recent report by ICRA, overall gold loan expanded at a compounded annual growth rate of 25% over the period of FY20-24, driven by banks, which grew these loans at a higher CAGR of 26%. NBFCs’ gold loans witnessed an increase of 18% during the same period.
Banks’ gold loan growth was driven by agriculture loans backed by gold jewellery, which grew at a CAGR of 26% during FY20-24, while their retail gold loans expanded by 32% on a lower base.