New RBI norms and rising prices could pose a risk to gold financiers, says India Ratings

The new RBI regulations and the classification of gold loans into consumer loans (CLs) and income generating loans (IGLs), the rating agency said, have given lenders flexibility in calculating the loan-to-value (LTV) ratio. | Photo credit: Getty Images

The new RBI regulations and the classification of gold loans into consumer loans (CLs) and income generating loans (IGLs), the rating agency said, have given lenders flexibility in calculating the loan-to-value (LTV) ratio.

“In the case of non-bullet loans, participants have interpreted the regulations to design products so that even though they provide an LTV of 85 percent, accrued interest is not included in the LTV calculation. This reduces the margin of safety of the product. Furthermore, offering non-bullet CLs or structuring products in such a way that accrued interest is settled one month before maturity poses a risk of a higher LTV when accrued interest is taken into account, especially during elevated gold price volatility,” said Karan Gupta, director and head of financial institutions, India Ratings.

“In addition, lenders are pricing gold based on the lower of the 30-day (India Bullion and Jewelers Association) IBJA price average or the current price, which could reduce risk by 4-5 percent. Moreover, considering a reduced gold weight for impurities can provide a margin of safety,” he said.

Recent creations should be monitored in real time for LTV, the rating agency said, taking into account accrued interest. Any build-up of risk must be quickly corrected with auctions. IGLs, assessed for amounts above ₹0.25 million, carry significant risk and many gold loan NBFCs have switched to IGLs, a trend observed with rising gold prices.

Higher volatility

While assets under management are increasing, tonnage growth is lagging, pointing to larger loans and a shift to IGL with an LTV above 85 percent. A significant portion of the loan portfolios are classified as IGL due to a 100 percent increase in gold prices in the past 24 months, allowing borrowers to access higher LTVs as per regulatory standards.

“This exposes gold lenders to increased gold price volatility risk, which could increase auctions and losses if volatility is high. Historically, gold prices have been volatile at 15-20 percent, with LTV norms capped at 75 percent. In the current scenario, it will be interesting to monitor lenders’ portfolios if similar volatility occurs at higher LTV levels under the new regulations,” the rating agency said.

Accordingly, lenders should tighten their policy framework for IGLs and limit LTVs within a reasonable threshold given the linear increase in gold prices. Also, CLs must be calibrated and regulations must be followed in their true spirit, especially with regard to accrued interest in LTV calculations for both bullet and non-bullet payment loans.

Published on November 20, 2025