Gold prices correct: Jewellers may gain, but will gold loan growth and lender margins take a hit?

A correction in gold prices could improve affordability for jewellery buyers and encourage consumers to resume purchases postponed during the rally. However, the same trend could pose challenges for gold loan companies by reducing collateral values and limiting borrowing capacity, even as intense competition puts pressure on lenders' margins.

Ponmudi R, founder and CEO of Enrich Money, said lower gold prices could support jewellery demand, particularly during the wedding and festive seasons. However, the benefits for jewellers would depend on inventory management, as retailers holding gold purchased at higher prices could face short-term valuation losses and margin pressure.

For gold loan companies, the impact is different. Since loans are backed by pledged jewellery, falling gold prices reduce the value of collateral and can lower the amount lenders offer to new borrowers. Existing loans originated when gold prices were higher could also face a reduction in their collateral cushion, particularly where loan-to-value (LTV) ratios are elevated.

“In my view, lower gold prices can stimulate jewellery consumption, but they do not automatically improve profitability for jewellers,” Ponmudi said, adding that collateral coverage, LTV discipline and asset quality would determine the impact on gold financiers.

Gold loan lenders have a collateral cushion

Despite the potential pressure from falling prices, lenders' existing collateral buffers could help limit the impact on credit costs.

Shreepal Doshi, senior analyst covering non-banking financial companies (NBFCs) at Equirus Securities, said most gold loan lenders currently have LTV ratios of around 60-70%, with lenders operating at 60-65% considered to be in a comfortable position.

A sharp contraction in gold prices could push non-performing assets (NPAs) and credit costs higher, but Doshi does not expect a 20-25% decline from current levels under prevailing macroeconomic conditions. He also pointed to gold's high liquidity as a factor that could help lenders manage collateral-related risks.

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LTV measures the loan amount against the value of the pledged gold. A lower ratio provides a larger buffer against a decline in collateral prices before the outstanding loan approaches the value of the security.

Doshi cited LTV ratios of 64% for Muthoot Finance in the first quarter of FY27, 65.6% for Manappuram Finance, 68% for Fedbank Financial Services in the second quarter, and 70% for IIFL Finance in the second quarter. Capri Global Capital's reported ratio stood at 73.35% in the first quarter, which Doshi considers less comfortable.

Competition and borrower stress remain concerns

For gold loan companies, the bigger near-term challenge could be pressure on profitability rather than an immediate deterioration in asset quality.

According to Doshi, intense competition has led lenders to use pricing, underwriting-related concessions and employee poaching to gain market share. Gold loan yields have declined to 75-79 basis points a month from 100-105 basis points earlier, while operating costs remain elevated.

Separately, Piramal Finance estimates that 15-23% of industry gold loan disbursements in FY26 went to borrowers who were more than 90 days overdue on at least one other loan. Doshi said this overlap was not necessarily a major credit concern for gold financiers, given collateral protection, but could indicate rising financial stress among borrowers of unsecured, small-ticket loans.

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Gold prices down 20% from January peak

Gold prices in India have corrected sharply from their record highs in January, potentially improving affordability for jewellery buyers while changing the collateral dynamics for gold loan lenders.

Gold hit a record ₹1,76,306 per 10 grams on January 29. By October 27, it had opened at ₹1,40,664 per 10 grams, down around 20% from its peak. In the previous session on October 26, spot gold closed at ₹1,41,170 per 10 grams. Meanwhile, the December 2026 gold futures contract on the Multi Commodity Exchange (MCX) traded at ₹1,42,470 per 10 grams on October 27, down 0.42% from the previous close.

The correction could encourage consumers who delayed jewellery purchases during the rally to return to the market. However, the extent to which lower prices translate into higher sales will depend on consumer sentiment, wedding-season demand and household purchasing power.

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For gold loan companies, the decline has a different implication. Since the value of pledged jewellery determines the collateral available against a loan, a sustained fall in prices can reduce borrowing capacity for new customers. It can also narrow the collateral cushion on existing loans, particularly those issued at higher loan-to-value ratios.

However, the impact is not necessarily immediate or uniform across lenders. Institutions with conservative LTV ratios have a greater buffer against price volatility, while the extent of any deterioration in asset quality will also depend on borrowers' repayment behaviour.