Recent data presented by the Finance Ministry in the Lok Sabha highlights growing financial stress among households, with a significant rise in non-performing assets (NPAs) related to gold loans and an increase in per capita household liabilities.
NPAs, which occur when borrowers fail to repay three consecutive monthly installments (EMIs), have seen a sharp uptick. Finance Minister Nirmala Sitharaman, in a written reply, revealed that gross NPAs tied to gold loans in scheduled commercial banks (SCBs) surged by 21.03% between March and June 2024. Similarly, upper and middle-layer non-banking financial companies (NBFCs) reported an 18.14% increase in gold loan NPAs during the same period. As of June 30, 2024, the gross NPA ratio for gold loans stood at 0.22% for SCBs and 2.58% for NBFCs.
The organized gold loan market, which includes banks and NBFCs, is projected to grow significantly. According to ICRA, it is expected to surpass ₹10 lakh crore in the current fiscal year, up from ₹9.2 lakh crore in FY24, and reach ₹15 lakh crore by March 2027.
To mitigate the risks associated with gold loan NPAs, the government and the Reserve Bank of India (RBI) have implemented several measures. For instance, the Financial Services Department directed public sector banks (PSBs) to conduct a thorough review of their gold loan portfolios, covering aspects such as collateral assessment, interest rates, and other charges. This review, spanning loans issued between January 1, 2022, and March 31, 2024, aimed to ensure compliance with regulatory standards and internal bank policies.
The RBI has also instructed supervised entities (SEs) to evaluate their gold loan policies and practices, identify gaps, and take corrective actions promptly. Additionally, lenders are required to monitor their gold loan portfolios closely and maintain strict oversight of outsourced activities and third-party service providers. To protect lenders from risks like gold price volatility and valuation errors, banks and NBFCs are restricted from offering loans exceeding 75% of the value of gold ornaments and jewelry.
The 75% LTV ratio must be maintained throughout the loan tenure. For bullet repayment loans (where both principal and interest are due at maturity), banks are prohibited from extending loans beyond 12 months from the date of sanction to minimize default risks. However, small borrowers are exempt from the LTV cap for agricultural gold loans, and lenders are allowed to disburse up to ₹20,000 in cash for such loans, as per RBI guidelines.
The rise in gold loan NPAs and household liabilities comes amid broader economic challenges. For instance, gold prices recently hit an all-time high of ₹85,384 per 10 grams on the MCX, reflecting its status as a safe-haven asset during uncertain times. Meanwhile, the Indian rupee continues to weaken, nearing the 88 mark against the US dollar.
These developments underscore the need for continued vigilance and proactive measures to address financial stress in households and ensure the stability of the gold loan market.