NBFCs are reporting a spike in overdue gold loan accounts, with Shriram Finance and Bajaj Finance seeing significant jumps in Stage 2 assets. Despite these signs of financial stress among borrowers, lenders continue to expand their branch networks aggressively. Investors may watch how companies balance this rapid growth with the need to maintain credit quality, especially as borrowers shift toward different repayment structures.
The gold-backed lending segment, once viewed as a safe haven, is seeing clear signs of repayment difficulty as non-banking financial companies (NBFCs) report a rise in stressed assets. Data from recent filings highlights a trend where borrowers, particularly those using equated monthly instalment (EMI) structures, are struggling to keep up with obligations. This has led to a jump in Stage 2 assets, which are loans where payments are late and are considered at higher risk of becoming non-performing.
Shriram Finance has reported a 71.1 percent surge in gross Stage 2 loans, with the gold loan segment contributing to this upward trend in delinquencies. Similarly, Bajaj Finance has seen its Stage 2 gold assets rise to 4.51 percent, a sharp increase from the 0.65 percent level reported a year ago. These figures provide a window into the current state of the loan book, indicating that the assumption of gold loans being low-risk is facing a reality check as borrower financial health comes under pressure.
Industry insights further suggest that the issue is not limited to isolated cases. Estimates from Piramal Finance indicate that a significant portion of gold loan disbursements, estimated between 15 and 23 percent, is flowing to individuals who are already overdue on other debt obligations by more than 90 days. This overlap suggests that many borrowers are using gold loans to manage wider liquidity problems, which naturally increases the risk for the lending institution.
In response to this, some lenders are adjusting their product strategies. There is a noticeable shift away from EMI-based gold loans toward bullet repayment schemes. In a bullet repayment structure, the borrower pays the principal and interest at the end of the loan tenure, rather than in monthly installments. This provides borrowers with immediate liquidity relief, which could help reduce defaults in the short term, though it requires the lender to manage the risk of a lump-sum payment at the end.
Despite these mounting credit risks, the sector is not slowing down its physical expansion. Companies are continuing to add branches at a steady pace to grab more market share. Bajaj Finance added 321 branches in the second quarter and maintains a target of reaching 2,800 gold-loan branches by the end of the 2027 fiscal year. Piramal Finance is also pushing ahead with plans to open 200 branches by the current fiscal year-end. This strategy of aggressive expansion involves significant fixed costs, meaning that the profitability of these new branches will depend heavily on the company's ability to maintain high loan growth while keeping credit losses under control.
Investors may want to monitor how this dual focus on growth and risk management plays out in the coming quarters. The key areas to track will be the movement in Stage 2 and Stage 3 assets, the pace of provisioning for potential losses, and whether the shift in repayment structures actually leads to lower delinquency rates over time.