Gold loans have huge growth potential in India.

India’s $27 billion gold loan market is undergoing a shakeout, with the new norms being put in place by the stock market regulator and the apex bank.

With gold demand from India rising from 462 tonnes to an estimated 1,079 tonnes, both gold exchange traded funds and gold loans have come under the scanner. The Securities and Exchange Board of India, the country’s stock market regulator, has proposed allowing gold exchange traded funds (ETFs) to park up to 20% of their gold holdings with commercial banks. The move aims to put the gold corpus of ETFs to productive use and help curb India’s huge gold imports.

Currently, gold ETFs need to maintain 100% of their gold reserves.

The Reserve Bank of India, also appears to favour banks over non banking financial companies (NBFCs), and has been scrutinising gold loans that monetize the idle gold in the country.

The government has also been trying to ascertain whether NBFCs extending gold loans have any role in influencing the gold price.

Data compiled by the apex bank showed that of the total gold loans outstanding at the end of March, banks provided 72%, while the rest were given by gold loan NBFCs.

But, the share of NBFCs doubled from 13% at the end of April 2018, which has displeased both the regulator and the apex bank.

India is known to possess large stocks of gold, estimated at about 12% of global gold stock. Over the past ten years, the value of gold in India has increased at a compounded average growth rate (CAGR) of over 16%.

“India has one of the highest savings rates in the world. It was 34% of GDP in FY10. Almost one third is invested in gold,”

bullion analyst with the broking firm, Ambit Capital.

He added that gold loan NBFCs have doubled their market share relative to banks in five years in the $27 billion (Rs 1,500 billion) Indian gold loan market given their aggressive pricing and rapid expansion plans.

The share of these companies in the gold loan market had risen to 27% at the end of March from 13% at the end of March 2008. However, the market share of banks’ declined to 72%, from 87% during the same period.

An alarmed regulator is looking to channel investment of retail investors from physical gold to gold linked instruments, given the staggering eightfold increase in gold loans in just four years.


Analysts maintain there has been a growing demand for gold loans. On an annual basis, gold loans in India have grown 70% in the last four years.

Citing figures, they said in 2019-20, the annual growth in gold loans from NBFCs soared to about 140%, though it declined later. However, since August 2019, when loans had fallen to 35%, it rose again steadily to 76% by February 2020.

According to available data, gold loans NBFCs do not pose a problem for domestic financial stability. A sudden drop in gold price by 30% to 40% will also not cause any financial distress to the gold loans NBFCs.

“NBFCs positioned gold loans as a convenient tool for raising loans. Geographical expansion of gold loan companies facilitated loan delivery, while the flexibility of loan options, easy to conform documentation has led to massive expansion of gold loans,” said a bullion analyst.

He added: “The average size of the gold loan increased because of the price increase of gold and the constricted availability of retail and personal loans from banks.”

India’s apex bank has noted that gold has outperformed other comparable assets on three of the last five years. There has not been a period with negative returns for gold, in fact. Also, in the last five years, the cumulative returns of gold are higher than other assets by a big margin.

By Alexandre Laurent

Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.

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