This report does not constitute a rating action.
Key Takeaways
- India's new rules to be implemented by next April will likely lead to business-model adjustments in the booming gold-backed loan niche.
- Credit appraisals based on analysis of borrowers' cash flows will necessitate large upfront costs for finance companies.
- We also think lenders will have more latitude to offer shorter-tenor loans for gold-backed consumption loans, allowing smaller borrowers to unlock more value from their pledged gold assets.
- Operational agility and service excellence will remain the key differentiator between lenders.
India's latest directions on gold loans will change the landscape for its booming lending niche. S&P Global Ratings believes lenders nimble enough to adjust their business model stand to gain.
Lenders have until April 1, 2026, to prepare for the changes. We see two elements of the new rules as the most notable.
The first is the inclusion of interest payments until maturity in the calculation of loan-to-value (LTV) ratios. This effectively could limit the upfront loan amount disbursed, something which lenders will try to overcome as this goes against typical borrower preference.
The second is the application of credit appraisal based on borrowers' cash flow analysis for consumption-focused loans above US$3,000 and all income-generating loans.
In our view, the adjustment to credit appraisals will be bigger for the nonbank financial companies (NBFCs) with dominant gold-based loan books, such as Muthoot Finance Ltd. (BB+/Stable/B) and Manappuram Finance Ltd. (BB-/Stable/B). NBFCs need to develop risk management policies and processes to evaluate borrowers' repayment capabilities based on cash flows. Traditionally, they have relied on collateral valuation. Bridging the skill gaps to hire and train loan officers on assessing repayment ability is both an upfront cost and a hurdle to overcome for these lenders.
Nimble Adjustments In Models Are Likely
We expect lenders to gradually increase the proportion of shorter tenor products with three-month and six-month maturities. From a customer retention point this is important to lenders. The shift would benefit low to middle-income borrowers by enabling them to receive larger upfront loan disbursements against their pledged collateral, given the new LTV settings.
We believe the Reserve Bank of India's (RBI) latest rules provide clarity on renewal of loans and will support this shorter tenor model. The rule now mandates that renewal is only subject to full repayment of the interest. In the past, NBFCs such as Manappuram Finance saw shorter tenor models run into regulatory headaches and being discontinued.
We also anticipate increased traction in income-generating loans. As LTV norms may be less binding, we expect some lender appetite to expand these loans in their portfolio. Income-generating loans would typically be based on regular interest servicing structures.
Table 1
| Loan-to-value ratios will ease for smaller gold-backed consumption loans… | ||||||||
|---|---|---|---|---|---|---|---|---|
| …but interest will be included in LTV ratios--so the easing is minimal | ||||||||
| Total consumption loan amount per borrower | Maximum LTV ratio | Credit appraisal method | ||||||
| Previous rules | Revised rules | |||||||
| ≤INR250,000 (roughly US$3,000) | 75% | 85% | LTV based collateral valuation | |||||
| > INR250,000 (US$3,000) & ≤ INR500,000 (US$6,000) | 80% | Cash flow analysis | ||||||
| > INR500,000 (US$6,000) | 75% | Cash flow analysis | ||||||
| Note: Consumption loans are predominantly bullet repayment loans. The LTV ratio will be based on the repayable amount at maturity including the interest payments. LTV--Loan to value. INR—Indian rupee. Sources: Reserve Bank of India, S&P Global Ratings. | ||||||||
In our view, even as lenders experiment with new models, the real differentiator will remain the ability to disburse loans quickly and seamlessly. These are longstanding attributes of NBFCs operating in this niche.
Against this, in an evolving landscape, the NBFCs' strong customer relationships, and investments in people and advanced analytics, could help them stay competitive.
Model Adjustments Will Come With Risk
As lenders explore new models and broaden risk appetite, it's possible that higher LTV norms could follow, particularly with products such as income-producing loans. This can raise the risk of heightened sensitivity to sharp corrections in gold prices.
Since the end of 2023, gold prices have surged by close to 80%, resulting in an unprecedented increase in the collateral value supporting gold loans. Corresponding loan books have also increased sharply (see chart 1).
From our perspective, despite the safeguards with respect to this niche lending, an emerging fault line is the overleveraging among vulnerable low- and middle-income borrowers that can amplify the credit risk.
In our view, an effective way to mitigate this risk to some extent will be by maintaining high borrower equity in the pledged collateral, on an ongoing basis. Lenders typically apply internal haircuts to the valuation of collateral. They ensure that the collateral appraisal value primarily considers only gold by excluding the cost of making jewelry and discounting the value of any precious stones set in the gold.
Historically, lenders have remained fairly conservative, with several rated financial institutions operating at an average LTV ratio at origination slightly lower than the earlier regulatory cap of 75%. This provides a buffer against potential declines in gold prices.
NBFCs such as Muthoot and Manappuram benefit from a sizable equity base, which should provide an adequate cushion.
In our view, the central bank's regulatory treatment of NBFC gold loans, which gives zero collateral offset, also alleviates price risk. These loans are also risk-weighted at about 100%, ensuring that the NBFCs remain resilient against potential fluctuations in gold prices while maintaining adequate capitalization.
However, banks benefit from the regulatory arbitrage here with risk weight of 0% on these loans. Banks are subject to greater regulatory monitoring than NBFCs, but such a treatment comes at a risk of effectively considering no possibility of unexpected losses from these loans.
Historically, credit losses on gold loans have been negligible compared with loans for auto purchases and small and midsize enterprises--losses are more associated with penal interest rather than principal. For gold loans, an increase in overdue loans is usually to give more time to the borrowers, so long as the lender is in the money, before auctioning the collateral.
Chart 2
Sri Lanka's Cautionary Tale: When Prices Fall, Leverage Hurts
Sri Lanka is a classic case where overleveraging in the face of declining gold prices contributed to a sharp deterioration in asset quality. In the years leading up to 2013, gold prices rose steadily. This was combined with a zero risk weight on gold pawning loans in the calculation of regulatory capital ratios and the absence of restrictions on LTV ratios. The result: Rapid growth in gold pawning loans, high nonperforming loans, and consequent credit losses.
Sri Lanka's case is a reminder of inherent risks in lending based on volatile underlying collateral.
New Rules Will Enhance Customer Protections
Overall, in our view, the latest rules try to harmonize the regulatory framework by bringing in standardization across the industry. It also addresses some of the prudential and conduct gaps across financial institutions.
The RBI s also emphasizing on customer rights in the sector by addressing management of gold loan portfolios, particularly in terms of collateral handling and auction processes. The guidelines now clearly state that pledged collateral and auction surpluses need to be returned or refunded to the borrowers within seven working days. All disbursements above Indian rupee 20,000 (about US$231) will be made directly to the borrowers bank account, rendering it easier for lenders to return auction surpluses.’
The RBI's increasing focus on customer protection is also reflected in its calls for greater transparency in disclosures related to interest rates and fees, as well as scrutiny over the outsourcing of core financial services to third parties.
Many banks often outsourced the assessment and handling of collateral to third parties, which may have increased operational risks. These requirements will likely bring such assessments in-house and could challenge some of the fintech platform-only entities that conducted such outsourcing activities.
Related Research
- Indian Government-Owned Financial Institutions, May 26, 2025, May 26, 2025
- Indian Microfinance Will Benefit From A Rain Check On Growth Plans, March 25, 2025, March 26, 2025
- Manappuram's Governance To Get A Bain Capital Uplift, March 24, 2025, March 24, 2025
- Various Rating Actions Taken On Large Indian Finance Companies On Improving Regulatory Environment, March 17, 2025, March 17, 2025
| Primary Contact: | Shinoy Varghese, Singapore 65-6597-6247; shinoy.varghese1@spglobal.com |
| Secondary Contacts: | Geeta Chugh, Mumbai 912233421910; geeta.chugh@spglobal.com |
| Deepali V Seth Chhabria, Mumbai 912261373187; deepali.seth@spglobal.com |
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