NBFCs Seek Cap on Gold Loans for Businesses: What It Means for Borrowers
Financial Express report from this week says large gold loan NBFCs have asked FIDC (the newly minted SRO for NBFCs) to petition RBI to cap LTV at 75% for gold loans given for business purposes. Why? Because from April 1, the new gold loan guidelines remove the regulatory LTV cap on income-generating gold loans entirely. Theoretically, a lender could advance 100% or more against pledged gold. The stated reason: "prevent smaller, riskier competitors from offering excessively high LTVs that could destabilise the market."
Let that sink in (Elon pun intended) - the largest players in gold lending are asking the regulator to stop others from offering borrowers more money against their own gold. Here's what's really going on.
High LTV is structurally dangerous for branch-centric gold loan incumbents. Not because the concept is flawed, but because their operating model can't support it safely (also they don't need to today). Large incumbents structurally avoid raising LTV for broadly the below reasons:
They have no incentive to change. With strong RoA, franchise strength, and low opex at 55–65% LTV, higher LTV offers minimal economic upside but introduces disproportionate tail risk. They're growing regardless. Why would any incumbent spend ₹500+ crore deploying precision assaying tech across thousands of branches, retrain their entire workforce, and set up centralised real-time monitoring — all to offer something that cannibalises a model already producing high RoA? They wouldn't. And that's rational. Scale creates systemic margin-call risk. Muthoot operates at ~₹1.4 lakh crore gold loan AUM, Manappuram at ~₹37,000 crore. At this size, even a 3–5% gold price drop can push millions of loans into breach territory if starting LTV is high — triggering mass auctions, collateral shortfalls, and liquidity stress. Also majority of their customers still rely on physical branches for servicing/payments, it'll be tough to collect at that scale only through branches. Auctions carry reputational and socio-political consequences. Gold is a deeply emotional asset for their TG. Large-scale auction waves become media events. Incumbents are highly visible brands and cannot afford political scrutiny or erosion of customer trust from aggressive LTV strategies. Higher LTV increases strategic default risk, and incumbents can't micro-manage it. They serve diverse walk-in customers across thousands of branches and cannot dynamically segment or reprice cohorts the way a tech-led platform can. Then there's assaying. Gold loan branches overwhelmingly rely on manual touchstone testing, even a basic XRF machine that read only the top 10–15 microns of a gold surface. At 60% LTV, a 15% overvaluation from a bad assay is absorbed by the cushion. At 85% LTV, that same error turns every such loan into a loss. Low LTV isn't just a risk management policy — it is the assaying error budget. It compensates for every spurious piece that slips through, every undertrained branch assayer, every uncalibrated machine. But it also means there's a large, underserved borrower segment — people who own good gold, need more cash against it, and are today getting only 55–65 paise on the rupee.
We started indiagold to serve exactly this segment. Tech-led assaying, centralised quality control, and a model designed from day one to operate safely at higher LTV.
Last year a large NBFC was barred them from fresh gold loan disbursals after finding assaying deviations, LTV breaches, and excess cash transactions. That's what happens when you push LTV higher without building the infrastructure to support it.
High LTV isn't inherently reckless. Low LTV isn't inherently prudent. What matters is whether your operating model, technology, and risk controls are designed for the LTV you're offering. Incumbents know theirs aren't. That's why they're asking the regulator for protection.
https://www.financialexpress.com/business/banking-finance/nbfcs-seek-cap-on-gold-loans-for-businesses/4146340/#
