Domestic gold loan lenders remain well insulated from risks arising out of potential corrections in gold prices, backed by strong risk management practices, prudent loan-to-value (LTV) ratios and efficient recovery mechanisms, according to a report by Crisil Ratings.
The report noted that despite the recent increase in the regulatory LTV ceiling to 85% for loans below ₹5 lakh, lenders have largely continued to maintain conservative LTV levels, helping safeguard portfolio quality and limit credit losses.
Strong safeguards support asset quality
According to Crisil Ratings, robust processes such as regular mark-to-market (MTM) valuation of pledged gold, adequate LTV buffers and streamlined auction procedures have enabled lenders to maintain negligible credit costs in their gold loan portfolios over the past decade.
While gold prices have witnessed a sharp rise since fiscal 2024, they continue to remain vulnerable to macroeconomic developments and market volatility. As part of its analysis, Crisil Ratings studied daily spot gold price movements over the past 25 years using a 90-day rolling window, reflecting the typical period from loan maturity to auction completion.
The study found that the steepest gold price correction during the period was around 20%, while declines exceeding 10% occurred in only about 2% of instances.
Repayment behaviour limits losses
Crisil Ratings also examined borrower repayment patterns, recovery trends across gold loan-focused non-banking financial companies (NBFCs), auction processes and collection performance of securitised gold loan pools.
The analysis identified three major factors influencing ultimate credit costs for gold loan lenders: prepayments before loan maturity, LTV levels at origination and on an MTM basis, and the effectiveness of risk management systems, including timely monitoring and auctions.
Crisil Ratings, Director-Financial Sector, Aparna Kirubakaran, said, “Our analysis of 12-month bullet repayment loans indicates repayment of around 90% by the end of the tenure, primarily due to high pre-closures. Of the balance, more than 75% of amounts remaining unpaid by the scheduled maturity are settled by the borrowers post contract maturity but prior to auction. This leaves a minuscule portion, typically less than 3% of the gold loans disbursed, recovered through auction of the jewellery pledged as collateral.”
Conservative LTV approach remains common
Although regulations effective April 1, 2026, permit LTV ratios of up to 85% for smaller-ticket gold loans, the report observed that most lenders continue to operate within a 65-75% LTV range.
This approach provides a significant cushion against fluctuations in gold prices and demonstrates lenders’ preference for maintaining prudent risk buffers rather than utilising the full regulatory limit.
Crisil Ratings assessed potential losses under various stress scenarios involving declines in gold prices and corresponding increases in portfolio LTV levels.
Principal recovery remains robust
The analysis showed that lenders are likely to achieve full recovery of principal amounts even under severe stress scenarios.
Crisil Ratings, Director-Structured Finance, Deepanshu Singla, said, “Our empirical analysis indicates no loss on the principal amount, post-auction, at the portfolio level, with sensitivity analysis showing full principal recovery across LTV scenarios. Recovery of the accrued interest, the biggest challenge, benefits from buffers maintained by NBFCs and interest rebates offered to encourage borrowers to make periodic interest payments. This keeps the MTM LTV ratio in check. Besides, the Reserve Bank of India guidelines prescribe using the 30-day moving average gold price to arrive at the LTV, thus providing an additional shield against price volatility.”
To illustrate, Crisil Ratings highlighted a scenario involving a 12-month bullet loan backed by gold valued at ₹100 and disbursed at a principal LTV of 72%. Assuming an 18% interest rate, a 20% decline in gold prices and a 5% auction realisation loss, the lender would still recover ₹76, ensuring full recovery of principal and approximately 89% recovery of the total outstanding amount, including accrued interest.
Outlook remains favourable
Crisil Ratings said lenders are expected to continue expanding their gold loan portfolios amid healthy demand conditions while maintaining disciplined risk management frameworks.
The agency added that although higher permissible LTV levels and gold price volatility warrant continued monitoring, the loss-given-default risk in the gold loan segment remains structurally low due to strong collateral coverage and established recovery practices.