Gold loans have done well but here’s how India’s small businesses could exploit the idea’s potential

The main reason household gold is seen as an ‘asset of last resort,’ one that is liquidated last, is its historical context. Traditionally, gold loans in India have been reserved for dire emergencies. This is driven by the cultural and emotional significance of gold jewellery, which many families refuse to melt or pledge (for too long) because it is essential for social functions and weddings.

While there has long been a buzz around making productive use of household gold, current windows like the Gold Monetization Scheme (GMS) are estimated to monetize hardly 1-2% of the total stock. Even proposals by the Indian Bullion and Jewellers Association to have the jewellery industry manage GMS for working capital needs face the same hurdle. To unlock this asset, psychological barriers must be addressed by providing a ‘locker-like’ experience.

Business owners frequently ask questions like, “Can I take out my necklace set for a wedding and pledge it back immediately after?” If lenders offer a revolving credit overdraft (OD) limit that lets people ‘check in’ and ‘check out’ individual pieces of jewellery, the perceived risk of losing family heirlooms evaporates.

Lifting these stigmas could enable a micro-business owner currently borrowing ₹50,000 for an emergency to confidently transition into a ₹20 lakh credit customer. Medium enterprises could leverage holdings for loans up to ₹2 crore.

If demand for such flexibility exists—as evidenced by the informal pawn broker market—why haven’t banks scaled this solution? The answer lies in two critical risks: valuation expertise and collateral traceability.

Jewellery valuation is not a core bank competence. They rely on external assessments, a largely un-auditable process prone to risks of overvaluation, collusion or fraud. While karat-meters offer objective measurements, XRF technology only penetrates 10-50 microns, making it vulnerable to fraudulent cores. Unlike jewellery shops, banks cannot melt gold to verify its purity.

Most banks still store gold using manual seals and tamper-proof packets in vaults. This makes frequent audits time-consuming and raises concerns of misappropriation by staff—a point of caution for the Reserve Bank of India (RBI). The operational burden of managing a revolving line of credit is too heavy for current branch staff without compromising other responsibilities.

To overcome these hurdles, India needs a specialized ‘jewellery valuation and custody management-as-a-service’ model. By separating these specialized activities from daily bank operations, we can build a robust, scalable phygital infrastructure. This would be implemented in phases.

First, in-branch service providers: Initially, third-party providers could operate in bank branches, investing in advanced valuation technologies and bearing the cost of assessors. They would manage identity marking, tagging and appointment scheduling for check-in/check-out processes.

Second, assessment centres: Providers could then set up independent assessment centres near high-demand MSME clusters that are technologically integrated with multiple banks, allowing for high volumes while maintaining end-of-day custody transfer back to bank vaults.

Third, licensed infrastructure: The final step could involve RBI issuing licences for ‘phygital service infrastructure providers.’ These entities would retain custody in their own secure lockers and issue ‘digital custody certificates’ that banks and non-banks could accept as collateral.

The modernization of this sector relies on adopting technologies already proven in retail and logistics. Using RFID or QR code laser marking would let lenders track individual pieces of jewellery. This level of traceability allows for the adjustment of OD limits in real-time as collateral is swapped, ensuring that the loan-to-value (LTV) ratio always stays within stipulated safety margins.

From a regulatory perspective, RBI’s concerns about inflation or systemic instability can be mitigated by strictly linking gold-backed credit with business use cases rather than individual consumption. Future refinements could include ‘dynamic LTVs,’ functioning like Basel’s counter-cyclical capital buffers to stabilize the system.

Further, industry-wide standardization of jewellery tracking could eventually be integrated with existing credit records, providing a more comprehensive view of an MSME’s financial health.

Gold is more than a financial asset; it is a multi-generational symbol of security. Now, India can turn it into a growth catalyst for MSMEs in a way that honours cultural values while aiding its economic agenda.

The authors are, respectively, founder and CEO of milliGOLD; and a financial services and fintech lawyer.