Gold loan non-banking financial companies (NBFCs) could face rising pressure as sharp swings in gold prices combine with aggressive product structuring under new regulatory norms, India Ratings and Research (Ind-Ra) said, warning that lenders may be underestimating the erosion of safety buffers during periods of heightened price volatility.
In a new assessment, Ind-Ra said the Reserve Bank of India’s updated rules and the bifurcation of loans into consumption loans (CLs) and income-generating loans (IGLs) have provided the sector with greater flexibility in calculating loan-to-value (LTV) ratios. But this has also encouraged practices that could magnify risk, especially as gold prices rise and volatility increases.
According to Karan Gupta, Director, Financial Institutions, Ind-Ra, some lenders are designing non-bullet products that offer an 85 per cent LTV while excluding accrued interest from the LTV calculation. “This reduces the margin of safety of the product,” he said, adding that structuring CLs to ensure accrued interest is cleared just one month before maturity increases the probability of LTV spiking during periods of volatility.
NBFCs typically value gold using the lower of the 30-day India Bullion and Jewellers Association (IBJA) average or the current market price, a practice that can reduce risk by 4 to 5 per cent. Lenders also discount gold weight for impurities, which provides an additional buffer, Ind-Ra noted. However, these safeguards may prove insufficient if volatility surges sharply, especially for newer loans.
The agency said recent originations must be monitored in real time, with accrued interest incorporated into LTV calculations to avoid hidden risk accumulation. Swift corrective measures—primarily through timely auctions—are critical if the actual collateral value begins to fall below acceptable thresholds.
Ind-Ra highlighted that IGLs pose a bigger challenge. Loans above Rs 2.5 lakh, assessed under the IGL category, have seen rapid expansion as lenders tap strong gold price momentum. Many gold loan NBFCs have shifted their books towards IGLs as gold prices have doubled over the past 24 months, allowing borrowers to qualify for higher LTVs under the regulatory framework. While this inflates assets under management, overall tonnage growth has not kept pace, implying a rise in ticket sizes rather than customer base or volume expansion.
“This exposes gold lenders to heightened gold price volatility risk, which could increase auctions and losses if volatility is sharp,” Ind-Ra said. Historically, gold prices have displayed volatility in the range of 15 to 20 per cent, when LTV caps were lower at 75 per cent. With current LTVs exceeding 85 per cent in many cases, the buffer is materially thinner, raising the probability of portfolio stress if similar price swings return.
Gold prices have risen 61 per cent so far this year, creating strong headline growth for gold finance providers. As 60 to 75 per cent of assets under management come from repeat customers, lenders have largely benefited from rising collateral values. But Ind-Ra said growth over the past five years has been driven by value rather than volume, increasing the need for strict controls on price-linked risk.
The agency recommended that lenders tighten policy frameworks around IGLs, introduce caps to keep LTVs within prudent limits and recalibrate CL structures to ensure regulations are followed in letter and spirit—particularly regarding accrued interest in LTV calculations for both bullet and non-bullet products.
Ind-Ra said the sector faces a critical period as the interplay between rising prices, elevated LTVs and innovative loan structures could test the resilience of gold loan NBFCs. If volatility rises as sharply as in past cycles, lenders may need to prepare for higher levels of auctions and potential losses. |
