Gold loans are billed as the safest bet in secured lending. High value (on Thursday, 10 gms in Delhi cost about ₹1.12 lakh), tangible security and quick disbursal make them attractive for banks and NBFCs.

Gold-backed loans now account for 1.1% of total bank credit, nearly doubling their share from 0.6% a year earlier. A report by PwC, Striking Gold: The rise of India's gold loan market, notes that the current market penetration of gold loans in India is 5.6%, leaving significant potential for new players to enter the gold loan market.

But beneath this safety lies an operationally intense business model. Unlike many other secured loans, gold lending can't be automated end- to-end. Every ornament pledged belongs to a customer, holds value beyond its intrinsic price, and must be handled with the highest standards of integrity and care. Without robust processes, strong systems and trustworthy employees, gold loans can turn into a trap for lenders and borrowers.

A recent case in Telangana highlights the risks. At SBI's Chennur branch, an internal audit revealed that 21 kg of pledged gold and cash were missing. The branch cashier reportedly siphoned off customer gold and pledged the same with gold lenders and availed 142 gold loans in the name of 44 persons. Fake loans were created, collateral was misappropriated, and customers were left in shock when the fraud surfaced.

For customers, this wasn't about losing collateral - it was about losing trust. For the institution, it meant reputational damage and a financial loss of over ₹13 cr. Even for a large bank, such fraud makes customers wary, while for smaller lenders, a single incident of this scale could threaten survival.

Unlike mortgages, gold loans involve physical assets that are small, highly valuable and easy to misappropriate. This creates unique vulnerabilities:

• Unlike land or vehicles, gold can be moved discreetly, melted or resold within hours.
• Gold jewellery often represents family heritage or security, making its mishandling a personal and emotional blow to borrowers.
• Valuation, purity testing, storage, insurance and daily reconciliation all require meticulous checks and balances. A single lapse can undo months of effort.

Of late, there has been a rush of banks and NBFCs to enter gold loan business. But this is not a business to be entered lightly.

Without strict operational guard rails - dual controls, surprise audits, reconciliation of assets and physical verification - the security of gold becomes meaningless. Institutions must ensure that every step, from valuation to storage, is documented, cross-checked and auditable. Cutting corners creates cracks that fraudsters exploit.

While full automation is impossible, tech can support risk control through CCTV surveillance, biometric vault access, digital loan records, AI-based anomaly detection and audit trails. But these tools are only as good as the human intent behind them.

Human risk: More frauds are inside jobs than external thefts. Employee integrity is the strongest vault.

Audits key: Surprise inspections and independent reconciliations should be frequent and unforgiving.

Respect asset: Customers hand over their heirlooms in trust. Institutions must treat pledged gold not as their asset but as sacred property in custody.

Invest in training and rotation: A frontline officer who sees gold daily may normalise shortcuts unless rotated, sensitised and constantly reminded of the stakes.

Gold loan lending is a good business, but it is not an easy one. It is customer-sensitive, operations-heavy and requires trust at its core. Financial institutions looking to ride the gold loan wave must remember:

• Get operative processes right before you scale.
• Get right people who understand why those processes matter.
• Remember that what glitters in the vault is not profit first - it is the trust of millions of households.

Only with guard rails stronger than the glitter can gold loan lending shine.

(The writer is former central banker)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)