India Ratings and Research (Ind-Ra) has cautioned that gold loan non-banking finance companies (NBFCs) could face heightened risks as sharp volatility in gold prices and recent regulatory changes reshape lending practices across the sector. While the new rules provide clarity by categorising loans into consumption loans (CLs) and income-generating loans (IGLs), Ind-Ra noted that the flexibility in calculating loan-to-value (LTV) ratios may be encouraging structures that reduce lenders’ safety margins at a time when gold prices continue to rise rapidly.
According to the agency, gold financers are increasingly designing non-bullet loan products that allow LTVs of up to 85% without including accrued interest in the LTV calculation. "This approach, though technically within the regulatory framework, weakens the underlying buffer and could become problematic if gold prices turn volatile."
Ind-Ra pointed out that some lenders are offering non-bullet CLs or structuring repayment schedules so that accrued interest is cleared only a month before maturity, a practice that could sharply elevate LTVs once accrued interest is factored in, especially during periods of heightened price swings.
Karan Gupta, director of financial institutions at Ind-Ra, says lenders typically price gold based on the lower of the 30-day India Bullion and Jewellers Association (IBJA) average or the current market rate, a mechanism that mitigates risk by around 4%-5%. Additionally, applying reductions for impurities in gold helps maintain a margin of safety.
However, he stressed that the recent lending trends require tighter oversight.
Ind-Ra says recent originations must be monitored in real-time for their LTV position, including accrued interest, and any build-up of risk must be addressed promptly through auctions.
A significant trend flagged by the agency is the growing shift towards IGLs, particularly loans above ₹250,000, which now carry considerable risk. "Rising gold prices have led many gold loan NBFCs to move towards larger-ticket IGLs with LTVs above 85%. While this has contributed to an increase in assets under management (AUM), tonnage growth has lagged, indicating that portfolio expansion is being driven by value rather than physical gold volume," the rating agency says.
Ind-Ra observed that a large portion of loan books is now classified as IGL because borrowers have become eligible for higher LTVs under regulatory norms following the 100% increase in gold prices over the past 24 months. "This has exposed lenders to greater gold price volatility, which could lead to higher auction volumes and increased losses if the price cycle turns."
Historically, gold prices have shown volatility in the range of 15%-20%, with LTV caps at 75%. Under the new regulations allowing higher LTVs, Ind-Ra says it will be important to watch how lender portfolios behave if similar volatility returns. The agency cautioned that the current environment of elevated price levels and stretched LTVs could magnify the impact of even moderate price corrections.
Gold prices have risen 61% year-to-date, creating strong growth opportunities for gold loan NBFCs. Around 60%-75% of their asset under management (AUM) comes from repeat customers, and growth over the past five years among large NBFCs has been driven more by value than volume.
Ind-Ra says this makes it critical for lenders to implement tighter controls around price volatility and lending structures. The agency recommended revisions to policy frameworks for IGLs and advised lenders to cap LTVs within reasonable limits given the sustained increase in gold prices.
It also emphasised the need for CLs to be calibrated carefully and for regulations to be followed in spirit, particularly with respect to the treatment of accrued interest in LTV calculations for both bullet and non-bullet repayment structures.
