Borrowers looking to raise a few lakh rupees are increasingly weighing gold loans against personal loans, with the difference in interest rates influencing which option they choose. Pledging jewellery can make borrowing cheaper than taking an unsecured loan, and lenders are seeing some customers turn to gold-backed credit instead of conventional personal loans.
State Bank of India Chairman Challa Sreenivasulu Setty pointed to this shift during the bank's Q1 earnings call in August, saying some of its regular personal-loan customers were opting for gold loans because of an interest-rate difference of almost three percentage points.
“We have seen that many of our normal Xpress Credit customers are opting to take a gold loan. Obviously, there's an interest rate arbitrage, almost 3%,” Setty said.
Bajaj Finance is expanding its own gold-loan business, adding 321 branches in the September quarter. But its latest earnings call also highlighted a problem with how some of these loans were structured. The company said short-tenor schemes requiring customers to visit a branch every three months to pay interest or renew their loans had contributed to a rise in accounts showing increased credit risk.
Why Bajaj Finance Changed Its Gold Loan Terms
Bajaj Finance added 321 gold-loan branches in the September quarter, taking its network to 2,022. It expects to end FY27 with between 2,700 and 2,800 branches.
Its gold-loan book exceeded Rs 24,000 crore in the quarter, accounting for 4.1% of its balance sheet. The portfolio stood at Rs 11,789 crore a year earlier.
Stage 2 gold-loan assets rose by Rs 1,047 crore during the quarter to about Rs 1,100 crore. These are loans where credit risk has increased significantly but which have not yet been classified as non-performing.
Sandeep Jain, chief operating officer and chief financial officer at Bajaj Finance, attributed the increase to short-term schemes that required customers to return to a branch every three months.
“For a customer to come every three months to the branch for making full payment/payment of interest, coming for rollover becomes very cumbersome,” Jain said during the company's Q2 FY27 earnings call. “Accidentally, customer gets into delinquency.”
Jain said customers who became delinquent had to pay the outstanding principal and interest to regularise their accounts.
Bajaj Finance stopped offering the short-tenor schemes in August. It is moving towards loans with a tenure of about 12 months, while giving customers the option to pay interest monthly or quarterly.
Longer Tenures, More Payment Options
The revised terms are intended to let customers make regular interest payments without having to return to a branch every three months to renew their loans.
Jain said customers could continue to choose bullet repayment, in which the principal is repaid at the end of the loan tenure. They could also take a longer-tenor loan and repay it earlier, according to management's comments on the call.
Rajeev Jain, vice-chairman and managing director of Bajaj Finance, said the company wanted to avoid customers falling into delinquency because of the structure of the loan.
The company said around Rs 550 crore of the affected gold-loan assets had moved back to Stage 1. Management described the rise in Stage 2 assets as temporary and said it did not expect the issue to affect credit costs or gold auctions.
Bajaj Finance's gold-loan branch network stood at 2,022 at the end of September, with the company targeting 2,700–2,800 branches by the end of FY27.
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