Why high gold prices are making both banks and borrowers smile
Soaring gold prices may have taken the yellow metal beyond the reach of millions, but for thousands who rely on it to run their small businesses or meet emergency financial needs, the surge has brought relief. The amount of gold auctioned by lenders due to defaults and compressed margin buffers decreased in the last fiscal year.
Lenders attribute this trend to improved underwriting standards and better post-disbursal monitoring of loans, following a warning from the
Reserve Bank of India
(RBI) against malpractices. Additionally, the spurt in gold prices has helped borrowers, allowing them to leverage more by pledging less amount of housing gold.
Impact of rising gold prices
Gold prices have surged by 36% globally over the past year and have risen by 87% in international markets over five years.
When the gold price increases, it leads to two scenarios:
1. Loan volume: The volume of
gold loans
rises as borrowers get more value for the pledged gold.
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2. NPAs: Gold loan non-performing assets (NPAs) decrease as borrowers prioritise timely repayment to avoid any auction of their gold. They also get top-up loans when the price of the gold metal rises, which helps them repay the previous loan.
Reduction in gold auction volumes
Muthoot Finance
, the largest gold loan provider in the non-banking space with ₹1.09 lakh crore assets under management (AUM) saw its gold auction volume decrease to ₹461 crore in FY25, down from ₹892 crore in FY24 and ₹2,203 crore in FY23, indicating reduction in dependency on collateral liquidation every year.
Manappuram Finance
, another significant lender in this segment with ₹24,658 crore AUM, saw a 40% reduction in its auction volume, from ₹979 crore in FY23 to ₹600 crore in FY25. However, in FY24, its auction volume was at ₹316 crore.
These lenders now maintain a loan-to-value (LTV) ratio of around 60% in sync with rising gold prices. When prices fall, the LTV ratio increases.
Indel Money
, another south-based gold loan provider, reported a 76% decrease in its gold auction volume, which fell from ₹165.82 crore in FY24 to ₹89.75 crore in FY25. Further, in FY24, total NPA was at 3.29%. It came down to 1.27% in FY25.
George Alexander Muthoot, managing director of Muthoot Finance told ET, "The decline in gold loan auctions is a testament to the improving credit behaviour of borrowers and the effectiveness of our proactive asset quality management."
The company had 208 tonnes of gold jewellery as security at the end of FY25 as compared to 188 tonnes a year back.
Lenders sell the gold jewellery pledged by borrowers typically after 90 days of classifying the loans as non-performing.
Gold in small businesses
Small businesses, kirana owners, small traders, and housewives, who find it difficult to access formal credit, mostly pledge their household gold for loans to run their businesses or to meet any emergency fund requirement.
According to HSBC Global, about 25,000 tonnes of gold are lying in Indian households, exceeding the combined gold reserves of the world's top 10 central banks, including the Federal Reserve, Deutsche Bundesbank, Banca d'Italia, Banque de France, Central Bank of the Russian Federation, People's Bank of India, and Reserve Bank of India.
The data from the RBI reveals that there has been a more than 100% jump in banks' outstanding loans against gold jewellery to INR2.09 lakh crore at the end of March 21, 2025, compared to INR1.03 lakh crore a year ago.
"When there is a price uptrend, gold loan NPAs come down. If any account turns into an NPA, there are multiple ways to make it standard and retrieve the gold," said Umesh Mohanan, executive director and CEO of Indel Money.
Recovery mechanisms
Top bank executives said that they increased monitoring in response to the surge in loan demand, resulting in a lower delinquency rate. This follows the regulator's nudge for better monitoring of their gold loan portfolios and ensuring adequate controls over outsourced activities and third-party service providers.
"We improved our recovery mechanism, and it happened primarily due to rigorous and timely follow-up measures undertaken at all levels," Ajay Kumar Srivastava, managing director of
Indian Overseas Bank
, told ET.
IOB had a gold loan portfolio of ₹69,188 crore, which was nearly 28% of the bank's total advances of ₹2.50 lakh crore.
"Continuous monitoring tools were introduced and proactive engagement with borrowers have resulted in better recoveries and a reduction in overdue accounts. As a result, the number of delinquent gold loans has remained low and under control," said Srivastava, adding that merely 0.03% of the gold loans slipped into NPAs compared to 0.10% a year back.
Managing director of
Indian Bank
Vinod Kumar seconded. "Delinquency ratio has improved over the last year due to close monitoring at various levels. The bank has conducted exclusively recovery drives for jewel loans which has resulted in a reduction of overdue percentage," he said.
At the end of March, Indian Bank's gold loan portfolio stood at ₹96,410 crore, representing 16.4% of its total advances of ₹5.88 lakh crore. The bank's gold loan NPA was approximately ₹53 crore (0.05% of the portfolio), down from ₹80 crore (0.10% of the portfolio) a year earlier.
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