By Kshipra Petkar
The Reserve Bank of India’s guidelines are prompting gold financiers to shift from a collateral-based model to a cash flow-based assessment, with analysts expecting lenders to incur upfront costs during the transition.
The operating expense has been on a rising trend for gold financers, where there has been increased compliance cost due to higher regulatory oversight on areas such as know-your-customer requirements and assessment of gold purity as per the RBI rules, India Ratings said in its report.
Earlier this month, the RBI raised the loan-to-value (LTV) ratio for lending against gold to 85% from 75% currently for borrowings under Rs 2.5 lakh. The LTV ratio has been fixed at 80% for loan amounts between Rs 2.5-5 lakh and 75% for loans above Rs 5 lakh. Lenders have time until April 1, 2026, to prepare for the changes.
“We also think lenders will have more latitude to offer shorter-term loans for gold-backed consumption loans, allowing smaller borrowers to unlock more value from their pledged gold assets,” S&P Global Ratings credit analyst Shinoy Varghese said in a report.
The report also highlighted that as lenders explore new models and broaden risk appetite, it’s possible that higher LTV norms could follow, particularly with products such as income-producing loans. This can raise the risk of heightened sensitivity to sharp corrections in gold prices.
Historically, lenders have remained fairly conservative, with several rated financial institutions operating at an average LTV ratio lower than the earlier regulatory cap of 75%. This provides a buffer against potential declines in gold prices, the report said.
“Global gold prices have rallied 36% over the past year. Over a five-year period, gold prices in international markets have risen 87%. When gold price increases, it leads to two scenarios. One, demand for gold loan will go up. Two, gold loan NPAs will come down. People will immediately pledge their household gold to meet financial exigencies as surging gold prices will put more money into their hands,” Umesh Mohanan, ED & CEO at Indel Money said.
“Similarly, when there is a price uptrend, gold loan NPAs will come down. If any account turns NPA, there are multiple ways to make it standard and retrieve the gold. So, naturally, gold loan NBFCs are very optimistic about the gold price surge,” Mohanan added.
In the new guidelines, the RBI has also given clarity on the process for auctioning gold. Earlier, the process was at the discretion of lenders and at the comfort of the non-bank lenders, however, with the guidelines providing more clarity, analysts expect gold auctions to be more streamlined and spread out.
“The LTV at 85%, including interest accrued, would act as a stricter threshold for auctions across lenders, thereby mitigating the risk of auction delays and removing discretion of lenders in accommodating borrowers during a gold price increase. This is because auctions need to be mandatorily carried out for overdue borrowers,” India Ratings said in a report.
It added that risk filtering needs to be on a real-time basis for gold auctions, and alerts should be sent to borrowers for bringing additional margin money or collateral to avoid liquidation.
George Alexander Muthoot, managing director at Muthoot Finance, said that over the past year, the company has seen a consistent drop in the stage-III gold loan portfolio. Even the auction amount by Muthoot Finance was lower at Rs 461 crore in 2024-25 (Apr-Mar), from Rs 892 crore in FY24, which indicates a clear reduction in dependency on collateral liquidation.
“This trend underscores our customer-centric approach, where timely engagement and structured repayment solutions are helping borrowers retain their assets, while simultaneously enhancing portfolio health,” Muthoot said.