How are gold loan lenders safe even if prices crash 20%? Crisil explains

Gold loan portfolios of domestic lenders remain well protected against any sharp correction in gold prices due to strong risk management practices and conservative lending buffers, Crisil Ratings said on Wednesday.

The ratings agency said lenders have over the past decade reported almost no credit cost in this segment, helped by regular mark-to-market valuation of pledged gold, prudent loan-to-value (LTV) ratios and timely auction processes.

The assessment comes after the Reserve Bank of India allowed lenders to extend loans of up to ₹5 lakh against gold at a higher LTV of 85% from April 1, 2026.

Crisil said that despite the higher permissible limit, most lenders continue to operate at a more conservative LTV of 65-75%, which provides an adequate cushion against fluctuations in gold prices.

“Strong risk management processes protect the asset quality of the gold loan portfolio of domestic lenders — as measured by ultimate credit loss — from potential correction in gold prices,” the agency said.

Gold prices extended their decline on Wednesday ₹1.48 lakh per 10 grams as US dollar rally and growing expectations of tighter monetary policy continued to pressure precious metals.

In the overseas markets, spot gold slipped by $52.01, or 1.3%, to $4,058.10 per ounce, while silver fell nearly 2% at $60.48 per ounce.

Crisil studied daily spot gold prices over the past 25 years using a 90-day rolling window, which it said broadly captures the risk period from loan maturity to auction.

The sharpest fall seen during the period was around 20%, while a decline of over 10% occurred in only about 2% of instances.

The agency also examined repayment trends of borrowers, recovery patterns of gold loan-focused non-banking finance companies, auction track records and collection performance of securitised gold-loan pools.

It identified three main factors that determine credit cost in gold loans -- prepayment before scheduled maturity, LTV at the time of disbursement and on a mark-to-market basis, and the efficiency of monitoring and auction processes during periods of falling gold prices.

"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," Aparna Kirubakaran, Director-Financial Sector at Crisil Ratings, said.

"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," she added.

Crisil said its empirical analysis showed no loss on principal at the portfolio level even after auction under various stress scenarios, though recovery of accrued interest remained the more challenging part.

“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,” Deepanshu Singla, Director-Structured Finance, Crisil Ratings, said.

He said that recovery of accrued interest is supported by buffers maintained by NBFCs and interest rebates offered to borrowers to encourage periodic interest servicing, which helps keep mark-to-market LTV ratios in check.

Singla also said RBI rules requiring lenders to use a 30-day moving average of gold prices for calculating LTV provided an additional cushion against short-term volatility.

To illustrate the impact of a price correction, Crisil said that in a case where a loan is disbursed at 72% LTV against gold worth ₹100, the lender would still be able to recover the full principal even if gold prices fall 20% by maturity and the auction realisation is 5% below the actual gold price.