Gold loans in India have seen significant growth, with an increased reliance on gold as collateral. According to the Reserve Bank of India's (RBI) latest report, the gold loan market expanded substantially by September 2024 compared to the same period the previous year. However, the central bank has raised alarms over irregular practices within the sector, particularly among certain supervised entities (SEs).

Strong Growth but Rising Concerns

The RBI report highlighted the rapid growth of gold loans, which have become a vital financial tool for many individuals. This surge reflects the increasing popularity of gold as a reliable asset for securing funds.

Despite this progress, the central bank expressed concerns about gaps in practices followed by some entities involved in gold loans. These issues encompass shortcomings in outsourcing procedures, inconsistencies in gold valuation, lack of thorough due diligence, and inadequate oversight of the utilization of loan funds.

Regulatory Measures to Address Malpractices

In response, the RBI issued new guidelines on September 30, 2024. These directives urge entities to review and strengthen their policies, processes, and practices. The goal is to ensure that the sector's growth remains sustainable and free from irregularities.

These measures follow the rapid expansion of gold loan portfolios in some entities, aiming to safeguard borrowers' interests while maintaining financial stability.

NBFCs Maintain Dominance

Non-Banking Financial Companies (NBFCs) continue to lead the gold loan segment, holding a significant 59.9% share of the total gold loans disbursed by banks and NBFCs combined as of March 2024. “NBFCs maintained their dominance in loans against the pledge of gold ornaments and jewelry, with a share of 59.9% at the end of March 2024,” the RBI reported.

NBFCs play a pivotal role in meeting the demand for loans against gold, making them a critical component of this growing market.

Slowdown in Other Retail Lending Categories

While gold loans are on the rise, the report also noted a slowdown in credit growth for other retail lending categories. Growth in unsecured personal loans has declined significantly since September 2023. Additionally, microfinance and self-help group (SHG) loans have seen their growth rates drop by more than two-thirds over the past year.

Commitment to Transparency and Stability

The RBI’s focus on transparency and compliance underscores its dedication to ensuring financial stability and protecting borrowers. As NBFCs continue to lead in the gold loan market, these regulatory measures are expected to enhance trust and efficiency in this critical lending segment.