“Avoid buying gold if it’s not necessary,” Prime Minister Narendra Modi reiterated on September 1. Urging Indians to renew their pledge for an Atmanirbhar Bharat, Modi took to Instagram to appeal to citizens to support local products.

Lenders, meanwhile, are tapping the gold sitting in Indian households. Tata Capital and Godrej Capital have entered or expanded into gold-loan lending through acquisitions. Aditya Birla Capital joined the frenzy, with plans to open 200-300 gold-loan branches by March 2027 and build a network of around 1,000 branches over the next three years.

Banks and non-banking financial companies (NBFCs) are expanding aggressively into the segment as gold loans typically carry higher lending rates with lower losses. The pledged gold is also easy to value and sell if a borrower fails to repay.

But the growing competition is forcing established players to cut rates, while volatile gold prices are reducing the protection behind their loans. Siddharth Goel, Director of Asia-Pacific Financial Institutions at Fitch Ratings, said, “We do not see an immediate risk to lenders from the recent decline in gold prices.” However, he warned that another 15-20% fall could test lenders’ ability to contain losses, particularly if small businesses relying on these loans also struggle to repay.

In this edition of Chart of the Week, we look at why gold loans are booming and whether lenders can turn that growth into higher profits.

Why lenders want a piece of the gold-loan boom

A combination of rapid growth, low defaults and attractive interest rates is enticing lenders to the gold loan segment. In FY26, outstanding gold loans grew 50.4%, outpacing the 19.7% growth in loans to small business owners, 13.9% in personal auto loans and 9.4% in home loans.

Rising gold prices meant customers could borrow more against the same amount of gold. For example, Muthoot Finance's gold-loan AUM rose 44% YoY in Q1FY27 even as tonnes of pledged gold declined and customer growth was modest. Manappuram's gold-loan AUM nearly doubled over the same period as pledged gold also rose 18%.

Gold loans also saw fewer repayment delays. In FY26, just 1.2% of outstanding gold loans were overdue for one to six months, versus 2.1–3.3% for home, auto and small-business loans.

Even when borrowers fall behind, final losses tend to remain low because lenders can sell the pledged gold more easily than a house or repossessed vehicle. CRISIL says credit costs for gold-loan NBFCs, which cover provisions and loan losses, have stayed below 1% over the past five years.

Gold loans can also offer higher yields than some other secured products. IIFL Finance and Capri Global, for instance, reported gold-loan yields of around 18.6% in Q1FY27, compared with 10.5% to 16.8% from their housing and secured MSME portfolios.

Competition takes the shine off margins

Banks held around 78% of the organised gold-loan market at the end of FY26, although this includes large agricultural and other non-retail gold loans. Muthoot and Manappuram are leaders in the NBFC retail segment, but newer NBFCs are eating into their share, forcing them to offer lower rates to entice customers. 

NBFCs increased their share of the overall organised market from 18% to 22% over the past two years. But that growth is being spread across more players: the four largest gold-loan NBFCs’ combined share fell from around 90% to 70% over the past four years. Among others, Tata Capital, Godrej Capital and Aditya Birla Capital have expanded into gold loans. 

Motilal Oswal expects this shift to persist. “Going forward, we expect large private banks and diversified NBFCs to scale up their gold loan operations and network, while gold-loan NBFCs cede some market share,” it said.

Banks have access to cheaper funding through customer deposits, allowing them to offer lower interest rates. For instance, SBI’s gold-loan rates average about 9.6%, depending on the repayment plan. In comparison, Muthoot and Manappuram charge around 16.3% and 16.6%, respectively, depending on the loan scheme and interest-payment frequency.

So why opt for the costlier alternative? NBFCs cater more to smaller borrowers, offering faster processing, flexible repayment and easier access, especially in rural and semi-urban areas.

The impact of growing competition is seen in the recent numbers. Gold loans made up about 95% of Muthoot’s loan book in Q1FY27, and the portfolio grew 6% QoQ. But both its overall yield and net interest margin fell nearly 3 percentage points as it cut rates to retain its customers, while borrowing costs rose only marginally.

Manappuram had already made a similar trade-off. After aggressive rate reductions, its gold-loan yield fell over 5 percentage points to 17.1% in FY26. Group CFO Buvanesh Tharashankar said, “We had overcorrected in terms of pricing. So in Q1, we took some actions to enhance the yield.” He added that the company expects the yield to settle around 18%.

Volatile gold tests lenders’ protection

Falling gold prices don’t directly create repayment problems. The borrower owes the same amount, but the gold backing the loan is now worth less, which raises the loan-to-value ratio (LTV). The LTV shows the amount lent against the pledged gold’s current value.

A higher LTV means lenders have less protection in case the gold’s price drops sharply. The LTV can also increase if the lender provides additional loans against the same gold. The RBI allows lenders to provide consumption gold loans of up to 75-85% of the collateral value. Lenders must stay within that limit throughout the life of the loan.

Between Q4FY26 and Q1FY27, that cushion narrowed across the three listed lenders as gold prices fell over 5%. Muthoot’s implied LTV rose 5 percentage points to 64%; Manappuram’s increased 8.3 points to 65.6%; and IIFL’s climbed 7 points to 70%.

But the thinner cushion hasn’t led to large losses yet. IIFL’s gross bad-loan ratio for gold loans rose from 0.35% in Q4FY26 to 0.61% in Q1FY27. The company said that it does not auction the pledged gold immediately after a missed payment when the gold is still worth enough to cover the loan. IIFL’s losses after recoveries on defaulted gold loans have also stayed close to zero over the past 15-16 years.

The real warning sign would be if LTVs, bad loans and actual losses rose together after a sharp fall in gold prices. Lenders may then struggle to recover the full loan amount even after selling the pledged gold, forcing them to absorb the shortfall. 

Analysts remain optimistic, however, forecasting that the yellow metal will gain another 10% by year-end. “We expect central bank gold buying to remain a multi-year trend as countries diversify their reserves against geopolitical and financial risks,” said Lina Thomas and Daan Struyven of Goldman Sachs.