Lenders are concerned about the sharp increase in the gold loan defaults. According to data from the Reserve Bank of India (RBI), gold loan non-performing assets (NPAs) increased by 30% to Rs 6,696 crore as of June 2024 from Rs 5,149 crore just three months prior.
Gold loan non-performing assets (NPAs) increased by 62%, from Rs 1,513 crore in March 2024 to Rs 2,445 crore in June 2024, according to commercial banks. During the same period, non-banking financial companies (NBFCs) had a modest but noteworthy 24% growth in non-performing assets (NPAs), rising from Rs 3,636 crore to Rs 4,251 crore.
The improving economy has impacted income levels, making it difficult for borrowers to repay their loans, according to an article published in The Indian Express. Many clients promised gold to pay for medical bills, school fees, and home needs, but they were unable to fulfill payback obligations.
In addition, as gold prices increased, more people came to pledge their gold, causing banks’ outstanding gold loan balances to increase from Rs 1.02 trillion in March 2024 to Rs 1.54 trillion in October 2024.
Gold loans continue to be appealing due to their unique features, such as daily repayment alternatives, flexible repayment plans, and no prepayment fees. Gold loans are increasingly often accepted for short-term financial needs and support financial inclusion, according to Shaji Varghese, CEO of Muthoot Fincorp.
The RBI uncovers flaws in gold loan practices.
Concerns about anomalies in the gold loan sector have been addressed by the RBI. The central bank argued that the frequent defaults were driven by insufficient control of loan-to-value ratios, erroneous risk assessments, and opaque gold auctions. Lenders’ knowledge of financial products has risen, and they have been urged to enhance their processes.
Despite the hurdles, there has been tremendous growth in gold loans.
It’s worth noting that, despite these obstacles, the gold loan sector has continued to grow. Between fiscal years 20 and 24, institutional gold loans increased at a 25% compound annual growth rate (CAGR). Banks were the key driver of this development, with loans for agricultural backed by gold jewelry.