Declining income raises banks' worries, gold loan defaults rise; Why did NPAs rise by 30 percent?

Gold Loan Debt: The reason for the increasing default in gold loans is the ever-increasing debt. In fact, the slow pace of the economy has affected the income of the people, making it difficult for the borrowers to repay it.

Gold Loan NPA: Cases of default (non-repayment) among customers who take loans against gold have increased rapidly in the last few months. According to the data released by the RBI, the gold loan NPAs of banks and NBFCs have increased by 30 percent to Rs 6,696 crore as of June 2024. This figure stood at Rs 5,149 crore three months ago as of March 2024. According to the RBI, there has been a 14.6 per cent increase in the number of gold loan takers in the financial year 2022-23 compared to the earlier financial years.

Bank gold loans rise by 62%

In response to the RTI filed by 'The Indian Express', the RBI said that there was a tremendous increase of 62 percent in gold loan NPAs of commercial banks till June 2024. It increased from Rs 1,513 crore in March 2024 to Rs 2,445 crore. In the case of NBFCs, this figure increased from Rs 3,636 crore in June 2024 to Rs 4,251 crore, an increase of about 24%.

Why are gold loan defaults on the rise?

The reason for the increasing default in gold loans is the ever-increasing debt. In fact, the slow pace of the economy has affected the income of the people, making it difficult for the borrowers to repay it. In the first seven months of the current financial year (April to October), gold loans of banks saw an increase of 50.4 percent. As gold prices rose, people pledged their gold to meet household expenses, school expenses and hospital expenses. They defaulted on repaying the loan because they felt that the loan amount was more than the purchase price. However, a gold loan default will lead to a decline in their credit score.

Gold outstanding

at record levels: Customers rushed to pledge gold to banks and NBFCs to take advantage of the high price of gold, taking the outstanding loan to banks to Rs 1,54,282 crore as of October 2024. This was at a figure of Rs 1,02,562 crore in March 2024. It is also expected that the total gold loan outstanding of banks and NBFCs has crossed the Rs 3 lakh crore mark.

The increase in NPAs of  gold loans of banks has happened at a time when continuous efforts are being made by banks to reduce NPAs. Gross NPAs came down from Rs 6.97 lakh crore (5.89 per cent in advance) in March 2022 to Rs 4.56 lakh crore (2.79 per cent) by March 2024. The RBI has focused on irregularities in the gold loan sector. Banks and NBFCs have been instructed to review their policies. The central bank has identified weaknesses in monitoring the loan-to-value ratio, lack of cash weight and transparency during the auction of gold jewellery.

The RBI has focused on wrongdoing and lending in the gold loan sector. The central bank has asked banks to improve their rules and ways of working. The central bank also noted that mistakes are being made by many banks while giving bank gold loans. These mistakes include giving more loan amount than the price of gold, not assessing the value of the loan correctly and lack of transparency while selling gold, etc.

According to Shaji Varghese, CEO of Muthoot Finecorp, gold loans have been steadily increasing for the last few quarters. There are many reasons for its increase, such as there is no pre-payment charge like a personal loan. Apart from this, there is an option of daily payment and interest on the outstanding amount. There is also a lot of flexibility regarding repayment. He said, "Gold loan has become a good option to arrange money fast among customers. People are taking a lot of money through this, especially keeping in mind the short-term need.