Gold has been very much a part of India’s culture as a form of asset and status symbol, but the last few years have seen a tremendous rise in gold loans (taking loans against gold systems), a phenomenon that has changed household finance. The gold loan market is very small by the amount of household gold in India, but it has seen an increase of more than 100% over the last year. Now, it qualifies as the second largest consumer loan category after the home loan category.
Historical Context of Gold Ownership
In Indian culture, gold has a unique significance. Studies show almost every household possesses some gold, mostly in the form of ornaments. Gold has different uses: it is a way of saving, a safeguard against inflation and currency devaluation, an emergency fund, and a type of social and cultural asset (for weddings, ceremonies, etc.). Unlike the West, many Indian families do not sell their gold in difficult circumstances but only use it as collateral when they receive loans against it. Gold is passed on from generation to generation, adding sentimental and investment value to it.
Household balance-sheet data also confirm the dominance of gold, according to the CMIE-survey in 2019, 84% of the typical rural household’s wealth in physical assets consists of gold while only 11% of the wealth is in financial assets. In southern states this percentage is even higher (for example, in Tamil Nadu gold’s share is 28% and in Andhra Pradesh is 22%). However, only a small part of the gold is used as surety for loans by banks (approximately 5%). This may be due to the reluctance of Indian people to part with gold and a history of limited access to formal loans against gold.
Market Structure and Size
Now India’s gold loan sector has become a multi-trillion rupee industry, with RBI statistics marking a 128% growth in gold-backed loans. With NBFCs’ gold loans growing at a similar pace (for instance, Muthoot Finance’s AUM reached around ₹1.82 lakh crore), loans against gold are estimated to surpass ₹5–6 lakh crore (₹5–6 trillion) in 2026 (with the figures being much higher with the inclusion of NBFCs).
Key players: In the gold loan market, one can distinguish between organised lenders (banks and NBFCs) and unorganised lenders (pawnbrokers and local moneylenders). Unorganised lenders still represent 65% of the market (gathering their gold loans either through family connections or local branches). Among the first regulated lenders, NBFCs have taken the lead; historically, the major players such as Muthoot Finance and Manappuram captured a substantial share owing to their plethora of rural branches. However, banks are catching up fast, and state banks (e.g., SBI, PNB) and private banks (HDFC Bank, etc.) explore a range of gold loan schemes.
Product Mechanics
Gold loan is a secured form of lending where the borrower gives gold ornaments (typically 22-24 carat jewellery) as collateral. The lender examines the purity and weight of the gold to assess its worth. The loan amount is then determined as a percentage of the appraised value of the jewelry, commonly known as the loan-to-value (LTV) ratio. The Reserve Bank of India (RBI) has mandated that banks provide gold loans with an LTV ratio of no more than 75%. However, under a new rule effective from April 2026, lenders will be allowed to lend at different LTV ratios based on loan size, with LTV capped at 85% for loans of Rs 2.5 lakh and below, 80% for loans of Rs 2.5 lakh to Rs 5 lakh, and 75% for loans above Rs 5 lakh. Thus, small borrowers can take advantage of the gold lying idle with them.
Gold loan interest rates differ from lender to lender. Financial institutions such as banks generally charge 8–11%, while other financing players like NBFCs and fintechs charge higher interest rates (around 10-20% or higher). Loans can be of short term nature (usually 3 to 12 months) and can be of bullet type (where only interest needs to be paid) or amortizing type. As per the latest regulation bullet repayment is not allowed for more than 12 months.
In addition to the above, there are several aspects of transaction mechanics: lenders apply charges to transaction costs (processing cost, valuation cost, storage/insurance expenses, etc.). The KYC process is exactly the same here as in other types of loans; it is worth emphasizing that according to the Reserve Bank’s directives, all gold should be tested uniformly. Once the loan is repaid, the money should be returned to the borrower within a week period (the lenders are going to be fined otherwise). If the borrower can’t repay the borrowed amount, the lender can auction the gold (the grace period is to be notified), but acquire it himself (by lending entities/affiliates) on the reserve price which is 90% of the market price. Any excess income from the auction must be returned to the borrower within 7 business days of the proceedings.
Gold loans have one unique feature: as gold prices rise, loans can grow. As per Reserve Bank’s LTV rules, lenders can, thus, up the loan amount without asking for additional collateral. However, the decline in the prices can lead to margin calls. Thus, managing price risk is an important part of product design.
Risk Profile
Gold loans are secured loans which facilitate low default losses. In this category of loans, the rates of NPA are on the lower side as compared to other retail loans. As per RBI and rating agencies, lenders recover dues in gold loans with loss only in case the auctions don’t happen in a smooth manner. Fitch states that the increase in gold prices has helped in increasing the value of collateral, leading to low losses in gold loans. RBI also conducted a survey showcasing the slippage rate of gold loans being among the lowest amongst all loan categories.
But risks still exist:
Market price risk: The rapid decline in the value of gold may shatter the value of collateral. Borrowers might have pledged gold and when the loan exceeds 75 percent of the value of the gold, they might be faced with a margin call, having borrowed above their means. The RBI warned in 2026 that an extended correction in the price of gold could make it difficult for borrowers to repay loans. As a result, the lenders keep an eye on the moves in gold prices and they may ask for partial repayments once the loan-to-value ratio exceeds the stipulated limit. However, small retail borrowers do not have much leeway.
Credit risk: Customers who take out loans secured by gold are usually ‘half-baked’ participants, as they are often volatile earners and, if, for example, they have pledged gold to buy consumables and then, due to unfavorable circumstances their income goes down (say, due to bad harvest), the chances of default grow. Still, lenders do not suffer great losses due to the collateral. According to statistics, the level of delinquency in loan repayments has remained low.
Operational: The Reserve Bank of India and auditors have flagged the following concerning processes in the gold loan domain: inaccurate assaying (thus lending too much), and false auction conduct and delayed gold returns. These operational lapses harm borrowers. To address these issues, the Reserve Bank of India has introduced new operating frameworks related to the assaying process, presence of a borrower, and auction disclosures.
Systemic Risk: While there is no excessive exposure of banks to gold loans, these loans comprise a significantly sized portfolio when looked at collectively. Due to rapid growth, banks with little prior exposure to gold loans have also ramped up exposure to this area. In the event of a shock affecting the gold loan market, several banks might suffer stress simultaneously. However, since these loans are always small-ticket loans, it is improbable that the failure of one lender (such as an NBFC) would affect others, as the auction process does continue to function normally. Hence, the real systemic risk lies with the households: the scenario where gold borrowings swell and gold prices collapse would result in several households being in a tough financial situation.
Gold Loans vs. Gold Prices
One essential query is why loan dynamics can be more significant than the gold spot price for several interested parties.
Regarding the borrower, increasing gold prices help them enhance their capacity to borrow without selling anything. Conversely, decreasing prices may entail that they need to pay back more or lose their collateral. As such, it is the dynamic of prices and their influence on collateral that matters for borrowers rather than the absolute prices. For example, if the Rs. 1 lakh loan was given at the gold price that equals ₹4,000/gm (this constitutes a loan secured with 25g of gold), and the price shoots up to ₹5,000/gm, this implies that the same gold can be used to secure a loan of ₹1.25 lakh to allow the borrower to top up their loan. In case prices fall to ₹3,000/gm, the loan can exceed 85% LTV and trigger a margin call.
Regarding lenders, the gold price gives a collateral cushion. During bull markets, high gold prices mean that lenders enjoy excellent security (having issued a small loan secured by expensive gold). However, lenders do not benefit from the price rise other than enabling them to lend more. When prices drop, lenders face concentrated action (there may be numerous borrowers defaulting in case of simultaneous calls). Due to this, lenders usually hedge their portfolios or maintain strict limits on LTV.
When compared to selling gold, borrowers generally prefer to take out loans. Even though gold prices may be very high, it is viewed by many as a long-term investment. Since selling gold will result in locked-in taxes or regret, taking out a loan leads to retaining the asset altogether. Therefore, we can say that high prices, in fact, increase loan demand, contrary to common-sense assumptions.
In terms of the price versus liquidity issue, gold is liquid but selling is definitive. Loans bring liquidity with an option of holding. Therefore, macroeconomists note that gold loans serve as an inflation-hedged credit for homes. At times of low-interest rates and the lack of cash, gold loans will help people monetize inflation-hedge.
In a nutshell, while many mass media resources are busy analyzing gold price charts, parties involved in loans are more interested in the metric of LTV and funding costs rather than in the price dynamics of gold as such. As our data analysis illustrates below, loan volumes increased in spite of gold prices.
Conclusion
In India, there has been an explosion in the use of gold loans, indicating the cultural inclination of the region towards gold and a growing demand for secured loans. People are just worried about gold price but it is the economics of gold loans (LTV, interest, collateral policies) that will affect the gold loan market. The size of the gold loan industry is small compared to the total stock of gold, indicating the potential for growth in the use of gold loans. However, the rapid growth of this sector and volatility in the price of gold require regulation and borrower awareness. The future of gold loan business will revolve around sound policies (RBI act and transparent bidding) and being a responsible borrower.
Bibliography
- Reserve Bank of India (RBI), Financial Stability Reports (2020–2026) – highlights on household debt and gold loans.
- Reserve Bank of India (RBI), Master Directions and FAQs on Priority Sector Lending (2024–2025) – guidelines on collateral classification and agri loans.
- World Gold Council, Gold Demand Trends: India Focus Q1 2026 (April 2026) – data on gold prices and investment/jewelry demand.
- World Gold Council, Market Update – Indian Gold Loan Market (Nov 2020) – survey of gold loans during COVID-19.
- Dasgupta, M. & Ponnathpur, R., “Savings in Gold by Low-Income Households in Rural India” (IIMA Working Paper, 2022) – cultural and behavioral analysis.
- PwC India, Striking Gold: The Rise of India’s Gold Loan Market (2023) – market statistics and penetration.
- TransUnion CIBIL, Gold Loan Landscape Report (Apr 2026) – credit bureau analysis of borrower profiles and portfolio growth.
- Business Standard (Mar 2026), “Banks’ gold loan portfolio surges 128% in February” – RBI data summary.
- Dasgupta, I. G., Ghosh, D., & Haldar, R., “Gold Loans Support Formal Credit Access” (RBI Bulletin Articles, 2025).
- Chandra Shekhar, Unlocking the Golden Promise: Analysis of RBI’s 2025 Gold Loan Framework (2025) – forthcoming academic study on gold loan reforms (indicative findings).
