A gold loan is secured against jewellery pledged by the borrower. The lender advances a portion of the collateral’s assessed value, retaining a margin to absorb potential losses if the borrower defaults and the jewellery has to be sold.
CreditSights, in its October 12 report, Indian Gold Loans: Rising Risks, Resilient Buffers, noted that gold prices had fallen around 23% from their January-March 2026 peak at the time of the report.
A sustained decline could erode the difference between the outstanding loan and the value recoverable from the pledged jewellery. Loans originated when gold prices were near their peak could be particularly exposed because their collateral was valued at higher prices.
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Why loan-to-value ratios matter
LTV measures the loan amount against the value of the pledged gold. A lower LTV provides a larger cushion against falling prices, while a higher LTV leaves less room for collateral depreciation.
Underwriting standards at major gold lenders have remained broadly conservative, with LTVs capped at 75% at origination before the revised rules took effect on April 1, 2026. CreditSights estimates that average portfolio LTVs at Muthoot Finance, Manappuram Finance and IIFL Finance were around 66-70% at the end of June 2026.
The report also notes that lenders typically apply a 3-5% haircut to gold value during underwriting, while approximately 20% of the value of gems and workmanship is excluded from collateral valuation. These measures create additional protection against a decline in recoverable value.
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How much protection do lenders have?
Consider a simplified example: a borrower pledges jewellery valued at ₹1 lakh and receives a loan of ₹75,000, equivalent to a 75% LTV. If the collateral value falls by 23% to ₹77,000, the loan would represent nearly 97% of the revised collateral value, before interest, selling costs and other adjustments.
This illustrates why loans issued near peak gold prices can become vulnerable even without a borrower taking additional credit. However, a fall in collateral value does not automatically translate into a lender loss. Losses depend on borrower defaults, outstanding dues and the amount ultimately recovered through collateral sale.
Temporary correction or prolonged downturn?
A brief price correction may be manageable if borrowers continue repayments and lenders maintain conservative underwriting. A prolonged decline could weaken collateral protection, particularly for loans originated near the peak, while household cash-flow pressures could increase defaults.
CreditSights expects the impact of the recent price decline to remain manageable, with limited voluntary defaults in the near term. It nevertheless warns that asset quality could deteriorate over the next few quarters.
For borrowers, the key risk is losing pledged jewellery if repayment obligations cannot be met. For lenders, the test is whether collateral buffers, underwriting discipline and recovery mechanisms can withstand a sustained downturn.
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