30% jump in gold loan NPAs in April-June on slowing economy, debts

In a reply to the Right to Information (RTI) request filed by The Indian Express, the RBI said commercial banks have reported a sharp 62 per cent increase in gold loan NPAs to Rs 2,445 crore by June 2024 from Rs 1,513 crore in March 2024. In the case of NBFCs, the increase is smaller at 24% to Rs 4,251 crore in June 2024 from Rs 3,636 crore in March 2024.

The surge in gold loan defaults is attributed to the rising indebtedness as a slowing economy has affected income levels, making it difficult for borrowers to repay.

In the first seven months of the current financial year, banks have reported a steep 50.4 per cent rise in gold loan, driven by the sustained rally in gold prices and certain deficiencies in the loans segment flagged by the Reserve Bank of India (RBI).

When gold prices went up, people pledged their gold to meet household expenses, school and education fees, and hospital charges. They defaulted on the loans as they found the loan amount is greater than the purchase price and were oblivious of the fact that their credit score will come down after the default.

As customers rush to pledge gold to take advantage of high prices, gold loan outstanding of banks have jumped to Rs 1,54,282 crore as of October 2024, up from Rs 1,02,562 crore in March 2024. The gold loan book of banks and NBFCs together is estimated to have crossed the Rs 3 lakh crore mark.

Explained

Why borrowers default

The rise in gold loan NPAs has happened at a time when banks managed to bring down overall gross NPAs from Rs 6.97 lakh crore (5.89 per cent of advances) in March 2022 to Rs 4.56 lakh crore (2.79 per cent) by March 2024.

The RBI has taken note of the irregular practices in the gold loan sector and has directed lenders to review their policies and practices. The central bank has also identified weaknesses in monitoring loan-to-value ratios, incorrect application of risk weights, and lack of transparency during auctions of gold ornaments and jewellery.

The growing concern of gold loan defaults highlights the need for lenders to strengthen their credit assessment and verification processes, enhance financial literacy programs for borrowers, and implement more flexible repayment options.

According to Shaji Varghese, CEO of Muthoot Fincorp, gold loan has been growing steadily since the past few quarters owing to its own strong features including zero prepayment charges unlike personal loans, daily repayment & interest only on outstanding amount, flexibility in repayment, including bullet payment options and many more. “Today it is a widely accepted and a popular choice among customers especially for short-term requirements and acts as a vital financial inclusion tool,” he said.

Overall, organised gold loans expanded at a compounded annual growth rate (CAGR) of 25 per cent over the period FY2020-FY2024, driven by banks, which expanded these loans at a higher CAGR of 26 per cent, while the NBFCs expanded theirs at 18 per cent during the same period. The growth in the case of banks was driven by agriculture loans backed by gold jewellery, which grew at a CAGR of 26 per cent during FY2020-24, while their retail gold loans grew by 32 per cent on a lower base. Consequently, the share of the NBFCs reduced during this period, which were largely focussed on retail gold loans for consumption or business purposes, rating firm ICRA said.