Gold loan defaults have surged significantly, creating concern among lenders. As of June 2024, gold loan non-performing assets (NPAs) have risen by 30 per cent to Rs 6,696 crore, up from Rs 5,149 crore just three months earlier, according to Reserve Bank of India (RBI) data.

Commercial banks reported a 62 per cent increase in gold loan NPAs, which rose to Rs 2,445 crore in June 2024 from Rs 1,513 crore in March 2024. Non-banking financial companies (NBFCs) saw a smaller but significant 24 per cent increase in NPAs, reaching Rs 4,251 crore from Rs 3,636 crore during the same period.

Why are gold loan defaults rising?
According to a The Indian Express report, the slowing economy has affected income levels, leaving borrowers unable to repay their loans. Many customers pledged gold to cover household expenses, education fees, and medical costs, only to find themselves unable to meet repayment demands.

Additionally, with gold prices rising, more people rushed to pledge their gold, causing the gold loan outstanding of banks to jump to Rs 1.54 trillion in October 2024 from Rs 1.02 trillion in March 2024.

Gold loans continue to remain attractive due to their unique features, such as no prepayment charges, flexible repayment options, and daily repayment facilities. Shaji Varghese, CEO of Muthoot Fincorp, emphasised that gold loans are now widely accepted for short-term financial needs and promote financial inclusion, mentions The Indian Express report.

RBI identifies issues in gold loan practices
The RBI has also raised concerns over irregularities in the gold loan sector. The central bank highlighted that the weak monitoring of loan-to-value ratios, incorrect risk assessments, and lack of transparency in gold auctions led to such large-scale defaults. Lenders have been urged to strengthen their processes and improve financial literacy among borrowers.

Strong gold loan growth despite challenges
Interestingly, despite the challenges, the gold loan sector has grown steadily. Between FY20 and FY24, organised gold loans expanded at a compounded annual growth rate (CAGR) of 25 per cent. Banks led this growth, with a 26 per cent CAGR, driven by agriculture loans secured by gold jewellery.

As per the experts, the rise in gold loan NPA, the need for better credit assessment, borrower education, and more flexible repayment options. These measures can ensure sustainable growth in the sector while protecting lenders and borrowers alike.

Courtesy: Business Standard