India’s banking and non-banking finance companies have witnessed a remarkable surge in gold loans, prompting significant concern from the Reserve Bank of India (RBI). Recent data from the Finance Industry Development Council reveals a staggering 26% increase in gold loans during the first quarter of FY 2025 compared to the previous year, with a 32% rise from the March quarter. This growth translates to a total approved amount of ₹79,217 crore, marking a consistent upward trend over several quarters.

RBI’s Call for Scrutiny

During the April-June 2023 period, the growth rate stood at 10%, indicating robust performance despite intense competition in the sector. As of August 2024, gold loans soared nearly 41% year-on-year, reaching ₹1.4 lakh crore. In response, the RBI directed banks and finance companies to review their gold loan policies and rectify any discrepancies within three months. The central bank’s scrutiny revealed irregular practices aimed at maintaining clean accounts, including hiding bad loans and rolling over debts without proper valuation.

The Appeal of Gold Loans

Gold loans are often seen as a viable option when individuals face limited borrowing avenues. With collateral being relatively straightforward to assess, many resort to gold loans during financial hardships. Interestingly, the growth in gold loans outpaces the overall growth of the NBFC industry, which has seen a 12% increase year-on-year. Additionally, there has been a notable rise in loans for both new and used cars, as well as personal loans, which constitute 14% of NBFC lending. Home loans and property loans also contribute significantly, comprising 10% and slightly over 8% of total industry loans, respectively.

Navigating the Growth Landscape

As gold loan portfolios expand, the RBI’s proactive measures reflect its commitment to ensuring the stability and integrity of the financial system. The rapid growth presents both opportunities and challenges, necessitating careful management to mitigate risks associated with bad loans and irregular practices. The future will depend on how effectively financial institutions respond to these regulatory prompts and adapt to the changing landscape.