Rising Bullion Prices Drive Growth in Gold-Backed Loans

As gold and silver prices continue to rise, banks say loans backed by precious metals remain low-risk due to conservative valuation practices and the stable nature of bullion prices.

Bank officials say gold and silver used as collateral are valued below prevailing market rates, reducing exposure even if prices decline. Unlike the stock market, they note, bullion prices do not fluctuate sharply within short periods.

The price of gold surged to a new all-time high in the domestic market on Friday, crossing the Rs 300,000 mark for the first time.

According to the Federation of Nepal Gold and Silver Dealers’ Association, gold was traded at Rs 301,400 per tola on Friday, up from Rs 292,200 per tola on Thursday. The precious yellow metal had previously touched a record high of Rs 295,100 per tola on Wednesday.

“We use a separate valuation benchmark for gold,” said Prakash Kumar Adhikari, chief credit officer at Nepal Bank. “The valuation is about 25 percent lower than the market price, which limits our risk even if prices fall.”

Nepal Rastra Bank (NRB) data show that, as of mid-December 2025 of the current fiscal year 2025/26, 14 commercial banks had extended loans against gold and silver collateral. Nepal Bank accounted for the largest share, with loans worth Rs 41.46 billion.

Banks typically lend up to 70 percent of the assessed collateral value. Valuation is carried out by certified gold assessors, who examine purity, type of jewellery and workmanship. However, banks tighten monitoring when prices begin to fall.

“If gold prices decline after loan disbursement, borrowers are asked to repay part of the loan or provide additional collateral,” Adhikari said, drawing a parallel with margin calls in share-backed lending. “So far, we have not seen any non-performing loans in this category.”

To curb potential risks arising from sharp price swings, NRB revised its guidelines between mid-September and mid-October, capping gold- and silver-backed lending to Rs 5 million per borrower. Banks have been given time until mid-July 2026 to bring previously issued loans into compliance.

Chandani Shrestha, head of retail lending at Nabil Bank, said risks remain manageable as banks regularly adjust the loan-to-value ratio in line with price movements. “Loans are generally extended at 50 to 70 percent of the assessed value, and that ratio is maintained even if prices decline,” she said.

Banks say demand for gold-backed loans is rising due to quick processing and comparatively lower interest rates than unsecured personal loans. Borrowers can access funds almost immediately by pledging gold or silver.

“We complete the entire process and disburse loans within an hour,” Shrestha said, adding that the product has become increasingly popular among retail customers.

NRB data show that rising bullion prices have contributed to a sharp increase in such lending. By mid-December 2025, banks and financial institutions had extended Rs 94.54 billion in loans backed by gold and silver, up from Rs 83.28 billion in mid-July—an increase of Rs 11.25 billion, or 13.5 percent, in five months.

By contrast, overall credit growth during the same period stood at just 1.5 percent, or Rs 83.67 billion. Lending against fixed assets, fixed deposits and bills declined, while growth was strongest in gold-backed loans and credit cards.

In Nepal, gold and silver are widely used not only as jewellery but also as a form of savings. Given their liquidity, households often buy gold when they have surplus cash and sell or pledge it during financial stress.

While borrowing against gold was traditionally done through jewellery shops, banks have increasingly entered the segment by offering short-term consumer loans at lower interest rates, gradually attracting customers away from informal lenders.