Gold Price Correction Boosts Jewellery Demand, Challenges Lenders
Gold prices in India have experienced a significant correction, dropping approximately 20% from their peak in January. This shift is creating a dual impact across the market: improving affordability for jewellery buyers while simultaneously putting pressure on the collateral values held by gold loan companies.
On January 29, gold hit a record high of ₹1,76,306 per 10 grams. By October 27, the price had opened at ₹1,40,664 per 10 grams. This substantial fall could reinvigorate consumer interest in purchasing jewellery, particularly during upcoming wedding and festive seasons, according to Ponmudi R, founder and CEO of Enrich Money.
Jewellers Anticipate Increased Sales, Manage Inventory
The improved affordability is expected to encourage consumers who had postponed purchases during the rally to re-enter the market. This could translate into higher sales for jewellers. However, Ponmudi notes that the full benefit for retailers will depend heavily on effective inventory management. Jewellers holding stock acquired at higher prices may face short-term valuation losses and margin pressure.
Gold Loan Lenders Face Collateral and Profitability Challenges
For gold loan companies, the gold price correction presents a different set of challenges. Since loans are secured by pledged gold jewellery, a decline in prices directly reduces the value of the underlying collateral. This can lead to lower loan amounts for new borrowers and a shrinking collateral cushion for existing loans, especially those with high loan-to-value (LTV) ratios.
Despite these pressures, lenders often maintain collateral buffers that could help mitigate an immediate rise in credit costs. Shreepal Doshi, a senior analyst at Equirus Securities covering non-banking financial companies (NBFCs), points out that most gold loan lenders currently operate with LTV ratios around 60-70%. Lenders with ratios closer to 60-65% are generally considered to be in a more comfortable position.
LTV Ratios and Asset Quality Concerns
Doshi cited specific LTV ratios for major players in the first and second quarters of FY27:
- Muthoot Finance: 64% (Q1 FY27)
- Manappuram Finance: 65.6% (Q1 FY27)
- Fedbank Financial Services: 68% (Q2 FY27)
- IIFL Finance: 70% (Q2 FY27)
- Capri Global Capital: 73.35% (Q1 FY27) – considered less comfortable.
While a sharp, sustained contraction in gold prices could push non-performing assets (NPAs) higher, Doshi does not anticipate a 20-25% decline from current levels under prevailing macroeconomic conditions. The high liquidity of gold also acts as a safeguard, assisting lenders in managing collateral-related risks.
Competition and Borrower Stress Squeeze Margins
Beyond collateral values, gold loan companies face intense competition, which is significantly impacting profitability. Lenders are increasingly using pricing strategies, underwriting concessions, and even employee poaching to gain market share. This competitive environment has seen gold loan yields decline to 75-79 basis points a month, down from an earlier 100-105 basis points, while operating costs remain elevated.
Furthermore, Piramal Finance estimates that a notable 15-23% of industry gold loan disbursements in FY26 were directed towards borrowers already more than 90 days overdue on at least one other loan. While collateral protection may limit direct credit concerns for gold financiers, this overlap suggests rising financial stress among borrowers of unsecured, small-ticket loans, a trend that warrants close monitoring within the sector.