Gold loan defaults jump 30% to Rs 6,696 cr, prompting RBI concerns over rising NPAs

Gold loan defaults have seen a sharp increase, with non-performing assets (NPAs) rising by 30% to Rs 6,696 crore as of June 2024, up from Rs 5,149 crore in March 2024. This growth in NPAs reflects a broader trend affecting both commercial banks and non-banking financial companies (NBFCs). According to data from the Reserve Bank of India (RBI), commercial banks reported a 62% increase in gold loan NPAs, which escalated from Rs 1,513 crore in March 2024 to Rs 2,445 crore by June 2024. NBFCs also saw a 24% rise in gold loan NPAs, increasing from Rs 3,636 crore to Rs 4,251 crore during the same period.

The significant rise in defaults is largely attributed to a combination of rising household expenses, slowed income levels, and increasing debt burdens on borrowers. Many customers pledged gold to secure loans for a variety of needs, including household expenses, medical bills, and education fees. However, as the economic slowdown continued, borrowers struggled to repay the loans, as the loan amounts often exceeded their financial capacity. Additionally, the defaulting borrowers were unaware of the negative impact that missed payments would have on their credit scores, further exacerbating the issue.

In parallel, the overall gold loan market has witnessed substantial growth due to an ongoing surge in gold prices. By October 2024, the total outstanding gold loans in banks had reached Rs 1.54 trillion, an increase from Rs 1.02 trillion in March 2024. This surge was driven by customers pledging their gold as prices increased, and with rising loan-to-value (LTV) ratios, many borrowers found themselves taking larger loans. This increase in loan amounts, however, has resulted in a higher risk of defaults, as borrowers who initially sought loans for short-term needs now find themselves unable to meet repayment obligations.

The RBI has expressed concern over the rising NPAs and the practices within the gold loan sector. The central bank has identified several weaknesses, including inadequate monitoring of loan-to-value (LTV) ratios, improper application of risk weights, and a lack of transparency in the auctioning process of gold jewellery used as collateral. These issues have contributed to the growth in defaults, prompting the RBI to direct lenders to reassess their internal policies, improve loan monitoring mechanisms, and ensure greater transparency in auctions.

Despite the rising defaults, the gold loan sector has experienced steady growth over recent years. Between FY2020 and FY2024, the organised gold loan segment expanded at a compounded annual growth rate (CAGR) of 25%. Banks accounted for the majority of this growth, expanding at a CAGR of 26%, driven by agricultural loans backed by gold jewellery. In comparison, NBFCs saw a slower expansion with an 18% CAGR during the same period, primarily focusing on retail loans for consumption or business needs. Retail gold loans have seen substantial growth, with banks reporting a 32% increase in their retail gold loan portfolios during this period.

The RBI has emphasized the importance of improving credit assessment processes and enhancing borrower education to prevent further growth in defaults. Lenders are also being encouraged to implement more flexible repayment options, particularly in light of the increasing financial difficulties faced by borrowers. Strengthening these processes could help mitigate the growing risks in the gold loan sector while maintaining its role as a vital financial inclusion tool for short-term borrowing needs.

Gold loan defaults have also been impacted by the lack of financial literacy among borrowers, especially in rural areas, where a majority of gold loans are originated. Many customers who pledged gold for loans are unaware of the implications of missed payments, which can lead to the loss of collateral and damage to their credit histories. As the RBI continues to monitor the situation, the need for better borrower education and improved regulatory oversight in the gold loan sector has become more critical.