Falling gold prices, now near ₹1.53 lakh per 10 grams from a peak of ₹1.82 lakh, have raised concerns for gold loan borrowers. As the value of pledged collateral drops, lenders are keeping a closer watch on loan-to-value (LTV) ratios. Borrowers with bullet repayment loans face the highest risk of margin calls, where lenders may ask for extra gold or cash to secure the loan, potentially risking jewelry auctions if requirements are not met.
The gold loan sector is facing a period of heightened caution as gold prices retreat from their record highs set earlier in 2026. After peaking near ₹1.82 lakh per 10 grams in January, prices have corrected to trade around ₹1.53 lakh on October 12, 2026. This downward movement in the underlying asset value creates a unique risk for borrowers who have pledged their jewelry to secure loans.
The Impact on Loan-to-Value Ratios
At the core of the issue is the Loan-to-Value (LTV) ratio, which is the percentage of the gold's value that a bank or non-banking financial company (NBFC) has loaned to the borrower. For example, if a borrower pledges gold worth ₹10 lakh and takes a loan of ₹7 lakh, the LTV is 70%. The Reserve Bank of India (RBI) sets clear caps on these ratios, typically up to 75% for loans above ₹5 lakh.
When the market price of gold falls, the value of the collateral shrinks, but the loan amount remains the same. This causes the LTV ratio to rise automatically. If this ratio exceeds the regulatory limit or the lender's internal safety threshold, the lender may issue a margin call. This requires the borrower to either pay back a portion of the loan or deposit more gold to bring the LTV ratio back to a safe level.
Vulnerability of Bullet Repayment Loans
Not all gold loans face the same level of risk. The structure of the repayment plan is a critical factor. Bullet repayment loans, which allow the borrower to pay the interest and principal only at the end of the loan tenure, are the most exposed. Because the principal balance remains untouched throughout the loan period, there is no reduction in debt to offset the falling value of the collateral.
In contrast, loans structured with monthly Equated Monthly Installments (EMIs) are generally safer. By paying a portion of the principal every month, the borrower effectively lowers the LTV ratio over time, creating a cushion against price volatility.
Lender Strategies and Risks
Financial institutions are managing this volatility through conservative risk assessment. Many lenders maintain internal LTV limits—often 5% to 10% lower than the maximum allowed by regulators—to absorb short-term price fluctuations without needing to trigger immediate margin calls. However, as the correction in gold prices continues, the buffer for older loans originated at the peak of the market is thinning.
For borrowers, the primary risk is that failure to meet a margin call can lead to the auction of their pledged jewelry. Lenders have the contractual right to sell the collateral to recover the outstanding loan amount if the borrower cannot provide additional security or partial repayment.
Moving forward, market participants will monitor whether gold prices stabilize. Borrowers are encouraged to review the terms of their loan agreements and stay in contact with their lenders. The key monitorable for the sector remains the asset quality of NBFCs and banks with high exposure to bullet repayment schemes, as persistent volatility could lead to a rise in collateral liquidation cases.