Gold loan boom brings early stress signals for NBFCs

Gold-loan lenders are reporting early signs of repayment stress, even after two strong years for the sector. The warnings matter because gold loans have become a major growth area as lenders shift from unsecured to secured credit. Falling gold prices and heavier household borrowing could test borrowers’ ability to repay.

Bajaj Finance’s stage-2 and stage-3 assets rose ₹1,601 crore in the September quarter. Gold loans accounted for ₹1,047 crore of that increase. IIFL Finance’s bad-loan ratio also rose to 0.9% from 0.6%, while Fedbank’s stage-3 assets increased to 0.5% from 0.1% a quarter earlier.

Piramal Finance highlighted borrower quality rather than only current defaults. It said 15-23% of industry gold-loan disbursements over the past year went to customers who had been at least 90 days overdue at some point. Bajaj and Fedbank called much of their stage-2 movement technical, but lenders could still face higher provisioning or more auctions.

The gold-loan market has become one of India’s fastest-growing lending segments, according to the article. However, the provided text does not state its total size or give a precise growth rate for loans against jewellery among NBFCs and banks. The article therefore supports a direction of rapid expansion, not a numerical estimate.

The growth accelerated after the Reserve Bank of India tightened scrutiny of unsecured credit in November 2023. Gold loans then became an important alternative for lenders. They offer secured lending against pledged gold, while borrowers receive access to funds without relying only on unsecured borrowing.

The market’s expansion is visible in lenders’ continued appetite to grow their portfolios. Bajaj Finance is moving from short-tenure products toward longer-tenure gold loans, and Piramal Finance reported rising multiple borrowing. Muthoot Finance and Manappuram Finance had not yet declared their quarterly results, so the article does not provide their latest figures.

When gold prices fall, the collateral backing a loan becomes worth less. If borrowers have also taken on more debt against the same pledged gold, the loan becomes harder to support with that collateral. This matters because lenders may have less protection if borrowers stop paying.

The article says falling prices can force lenders to cut exposures quickly. Lenders may try to recalibrate the loan-to-value ratio, or LTV, by reducing the amount outstanding or demanding repayment of part of the loan. A borrower already carrying several loans may struggle to provide that money.

The result can be repayment stress, higher provisioning, or auctions of pledged gold. The article notes that LTVs may limit eventual credit costs because gold still provides security. But it also warns that delinquent loans can accumulate, creating more provisioning needs and auction activity even if losses remain contained.

A gold loan is credit secured by gold, usually jewellery. The borrower temporarily pledges the jewellery to a lender and receives money against it. Unlike an unsecured loan, this arrangement gives the lender a specific asset connected to the borrowing.

The lender assesses the pledged gold and sets a loan amount relative to its value. The borrower then makes repayments or follows the product’s repayment and rollover terms. Once the obligation is settled, the jewellery can be returned. If the borrower does not repay, the lender may use the pledged asset to recover money, including through an auction.

The article focuses on why this security matters during price changes. If gold prices fall, the collateral becomes less valuable compared with the loan. That can force lenders to adjust exposures and borrowers to repay part of the balance. The article does not provide a full product definition, so these mechanics use standard lending knowledge.

Short-tenure gold loans demand action sooner. Borrowers may need to visit a branch every three months to repay or roll over the loan. A missed payment or missed rollover can therefore appear as an overdue account quickly, even before a longer loan reaches its scheduled repayment point.

Bajaj Finance said its short-tenure products contributed to rising stage-2 and stage-3 assets. The company discontinued those loans in August and is shifting toward longer-tenure products. Fitch’s Siddharth Goel said shorter-tenure loans tend to show overdue accounts and delinquencies sooner than longer-term products.

This timing can make stress appear to accelerate. It does not necessarily mean every short-tenure borrower creates a larger eventual loss. Bajaj and Fedbank described parts of the stage-2 movement as technical, while Goel said eventual credit costs may remain limited because of loan-to-value ratios. Still, lenders could face more provisioning or auctions as delinquencies build.

Several gold loans increase a borrower’s total repayment burden. They also make it harder for any one lender to see the borrower’s complete obligations. If gold prices fall or income weakens, the borrower may struggle across lenders at the same time.

Piramal Finance said the share of customers with gold loans from another lender had risen to 35%, from 20-25% two years ago. It also said 15-23% of industry gross disbursements over the last year went to borrowers who had been more than 90 days overdue at least once in their lifetime.

A past 90-day delinquency signals serious repayment stress, even if the borrower is currently paying. Piramal said it does not lend to customers already more than 90 days overdue, and such borrowers represented less than 1% of its October disbursements so far. The broader pattern still raises concerns about borrower quality and overlapping debt.

Loan-to-value ratio measures the loan amount against the value of pledged gold. For example, a lender compares the outstanding credit with the jewellery securing it. The ratio helps show how much protection the lender has if the borrower stops repaying.

If the gold is worth substantially more than the loan, the lender has a larger cushion. If the loan approaches the gold’s value, that cushion is smaller. A fall in gold prices can push the LTV higher without any new borrowing. Lenders may then need to reduce exposure or ask for partial repayment.

The article says LTVs may limit eventual credit costs because gold remains collateral. Yet it also warns that price declines can create stretched LTVs and sudden repayment problems. If delinquent loans accumulate, lenders may need higher provisions or auction activity. Thus, collateral reduces potential losses but does not eliminate repayment or operational risk.