Growth in Gold Loans and NPAs, Reasons and RBI’s Draft Guidelines

The rising demand for gold loans in India has led to increased credit access but also a surge in Non-Performing Assets (NPAs), raising concerns over repayment risks and financial stability in the lending sector.

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Context: The RBI is drafting a new framework for gold loans in response to a surge in both gold loan outstanding and Non-Performing Assets (NPAs) in this segment.

Growth in Gold Loans and NPAs

As per RBI data, Gold loan NPAs rose by 28.58% in one year.
- The loan outstanding grew by 27.26%.
NPAs spiked from ₹5,307 crore (Dec 2023) to ₹6,824 crore (Dec 2024).
Total gold loan outstanding as of Dec 2024: ₹11,11,398 crore (vs ₹8,73,701 crore in Dec 2023).

Reasons behind increasing Gold Loan Defaults

Deficiencies in Loan Segment flagged by RBI

Weak monitoring of loan-to-value (LTV) ratios.
Incorrect application of risk weights.
Lack of transparency in gold auctions.
Valuation without customer presence.

Rising Indebtedness

A slowing economy has impacted income levels, reducing borrowers’ repayment capacity.

High Gold Prices

Increased gold prices encouraged people to pledge gold to meet expenses like household needs, education fees and medical bills.
Borrowers often defaulted due to the loan amount exceeding the gold’s purchase price, impacting their credit scores.

Earlier practice – Evergreening

Borrowers could repledge jewellery by just paying interest.
It allowed indefinite loan extensions without principal repayment.
Recent change ⏩ Borrowers must repay the full principal + interest before repledging.

Non-Performing Assets (NPA)

It is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days.
Classification (as per the RBI guidelines):
- Substandard assets: Assets which have remained NPA for a period of less than or equal to 12 months.
- Doubtful assets: An asset that has remained in the substandard category for a period of 12 months.
- Loss assets: It is considered “uncollectible” or of such little value that its continuance as a bankable asset is not warranted, although there may be some recovery value.
Metrics that help us to understand the NPA situation of any bank:
- Gross NPA: It refers to the total NPAs of the banks.
- Net NPA: Net NPA is calculated as Gross NPA -Provisioning Amount.
  - i.e. Net NPA gives the exact value of NPAs after the bank has made specific provisions for it.

RBI’s Draft Guidelines

Ban on lending against: Financial assets backed by gold/silver (e.g. ETFs, gold mutual funds).
LTV cap: Max 75% for consumption gold loans.
Loan Purpose: The Same gold collateral can’t be used for both consumption and income-generating purposes.
Collateral Verification: Lenders must ensure clear ownership records and maintain verification proof.
Loan Tenure: Bullet repayment loans (principal + interest paid at maturity) capped at 12 months.