Gold loan lenders shielded against price corrections despite higher LTV norms: Crisil

Domestic gold loan lenders remain well protected against the risk of a correction in gold prices, with strong risk management practices helping preserve asset quality even after the recent increase in the regulatory loan-to-value (LTV) cap to 85%, according to a report by Crisil Ratings.

The report said the sector’s resilience is underpinned by regular mark-to-market (MTM) valuation of pledged gold, conservative LTV practices, and efficient auction mechanisms, resulting in negligible credit costs for lenders in this segment over the past decade.

Although gold prices have surged since FY24, they continue to remain volatile and vulnerable to macroeconomic developments. To assess downside risks, Crisil Ratings conducted a stress test using daily spot gold price movements over the last 25 years and analysed a 90-day rolling window, reflecting the typical timeline from borrower notification to auction completion, which generally spans 45–75 days after loan maturity.

The analysis found that the steepest historical decline in gold prices during such periods was 20% while price corrections exceeding 10% occurred in only around 2% of instances.

Crisil also evaluated borrower repayment trends across loan cohorts, recovery outcomes in gold-focused non-banking financial companies (NBFCs), effectiveness of auction frameworks, and collection performance of securitised gold-loan pools.

The study identified three key drivers of ultimate credit losses in gold lending: prepayments before loan maturity, LTV levels at disbursement and on an MTM basis, and the effectiveness of risk management measures such as frequent monitoring and timely auctions during periods of sustained price declines.

Aparna Kirubakaran, Director – Financial Sector, Crisil Ratings, said repayment patterns significantly reduce loss risk. Our analysis of 12-month bullet repayment loans indicates around 90% repayment by tenure-end, primarily due to high pre-closures. Of the remaining overdue amounts, over 75% are settled by borrowers after maturity but before auction. This leaves less than 3% of disbursed gold loans to be recovered through auction of pledged jewellery,” she said.

While revised regulations effective April 1, 2026 permit LTVs of up to 85% for loans below ₹5 lakh, Crisil noted that most lenders continue to operate with a more conservative LTV range of 65–75%, maintaining sufficient buffers against market volatility.

Deepanshu Singla, Director – Structured Finance, Crisil Ratings, said the agency’s analysis showed no principal loss at the portfolio level even under stressed scenarios. “Our empirical analysis indicates full recovery of principal across LTV scenarios following auctions. Recovery of accrued interest remains the bigger challenge, but this is supported by buffers maintained by NBFCs and interest rebates that encourage borrowers to make periodic payments, keeping MTM LTV in check,” he said.

Singla added that the Reserve Bank of India’s requirement to calculate LTV using the 30-day moving average gold price provides an additional safeguard against short-term price fluctuations.

To illustrate, Crisil modelled a 12-month bullet loan backed by gold worth ₹100 and disbursed at an initial LTV of 72%. Assuming an 18% interest rate, the total outstanding amount at maturity rises to ₹85. Even if gold prices decline by 20% — the steepest historical fall observed — and auction realisations are 5% lower than prevailing prices, lenders would still recover ₹76, ensuring full recovery of principal and nearly 89% recovery of total dues including accrued interest.

Crisil expects lenders to continue relying on internal risk controls as they expand gold-loan portfolios to capture growing demand. While higher permitted LTVs and gold price volatility warrant monitoring, the agency said the loss-given-default risk in the segment remains structurally low.