Gold loans have become a favoured financial solution for individuals requiring immediate access to funds. Unlike personal loans, which usually demand extensive documentation and credit checks, gold loans offer a swift alternative as they are secured by the gold itself. Regulated by the Reserve Bank of India (RBI), these loans allow banks and Non-Banking Financial Companies (NBFCs) to lend up to 75% of the gold's market value. Thus, if a gold asset is worth Rs 1 lakh, a borrower can potentially secure up to Rs 75,000. However, some lenders may offer lower amounts based on their risk evaluations.
"The valuation of gold is based on the prevailing market price. Since gold prices fluctuate, the loan amount may vary accordingly. Borrowers should check the latest gold rates before applying for a loan to get the best possible value for their pledged gold," said Adhil Shetty, CEO of Bankbazaar.com.
Gold loan from banks and NBFCs
The distinction between banks and NBFCs in the context of gold loans is primarily reflected in interest rates and loan tenures. Banks tend to offer more competitive interest rates, starting from 9-10% annually, whereas NBFCs may impose rates as high as 28% due to varying risk assessment models. The loan tenures can range from a few months to three years, with shorter tenures usually attracting lower interest rates. Borrowers should evaluate their financial needs and repayment capacities when selecting a loan tenure, as longer periods may provide repayment flexibility but could result in higher interest obligations.
Borrowers can choose from multiple repayment options when opting for gold loans, enhancing their flexibility. These options include regular equated monthly instalments (EMIs) that cover both interest and principal in fixed amounts. Alternatively, there are interest-only payments, where borrowers pay just the interest monthly and settle the principal at the loan's end. Bullet repayment plans enable borrowers to repay both principal and interest in a single lump sum at the end of the loan term. "Each repayment method has its advantages. While EMI payments reduce the burden gradually, bullet repayment plans offer flexibility for those expecting a lump sum income in the future," Shetty said.
Women and gold loan
The credit market saw a significant rise in the number of women borrowers annually from 2019 to 2024, with 4 crore new women borrowers availing Rs 4.7 trillion of debt against their gold jewellery. A recent report by Cibil-Niti Ayog revealed that gold loans have become the top choice for women borrowers, accounting for 38% of total loans taken by women in 2024, marking a five-fold increase in gold loan volumes since 2019.
The report also highlighted a growing trend among younger women taking charge of their credit monitoring, with a 56% increase in their numbers compared to the previous year. These younger women now make up 22% of the self-monitoring women population in 2024.
The joint report by Transunion Cibil, Niti Aayog's women entrepreneurship platform, and Microsave Consulting emphasized that more women borrowers are choosing to access credit, opt for loans against gold, and actively monitor their credit scores.
Factors influencing gold loans
Several factors influence the loan amount one can secure from a gold loan. The purity of the gold, with lenders typically requiring a minimum of 18 karats, significantly affects valuation, with higher purity resulting in higher loan amounts. The weight of the gold is also crucial, but only the gold content is considered, excluding any stones or attachments on jewellery. Additionally, the current market price of gold, which can fluctuate daily, plays a pivotal role in determining loan eligibility.
Many banks provide gold loans starting at a minimum of Rs 10,000 and going up to Rs 1 crore for high-value clientele. NBFCs typically offer even larger loan amounts based on their risk assessment frameworks. There are specific loan schemes tailored for farmers by certain lenders, which include favorable interest rates and flexible repayment terms.
Payment Flexibility
Borrowers of gold loans are given a variety of repayment options to select from, enhancing the flexibility of this borrowing option. These options include:
Regular EMIs: Consisting of fixed monthly instalments covering both interest and principal payments. Interest-Only Payments: Requiring the borrower to only pay the interest each month, with the principal amount settled at the conclusion of the loan tenure. Bullet Repayment: Involving a one-time payment of both interest and principal at the end of the loan period.
Overall, gold loans present a straightforward borrowing option during financial crunches, providing a fast, flexible, and accessible means of securing funds. With multiple repayment strategies and loan products tailored to different needs, they remain a viable alternative to personal loans, which often involve more stringent requirements. This flexibility, combined with the regulatory framework ensuring fair practices, makes gold loans an attractive solution for many borrowers.
Increase in gold loan
According to data from the Reserve Bank of India, the outstanding amount of gold loans saw a significant increase of 68.3% or Rs 70,000 crore, reaching Rs 1.72 lakh crore by the end of December 2024. This marks a substantial rise from the Rs 1.02 lakh crore recorded in March 2024.
Comparatively, the growth in gold loans during the same period the previous year was only 12.7% or Rs 11,353 crore, totaling Rs 1 lakh crore. In contrast, non-food credit growth stood at 7.8% during the nine-month period ending December 2024.
State Bank of India, the largest lender in India, reported a notable 41.66% increase in its gold loans book to Rs 43,745 crore as of December 2024 on a year-on-year basis.