Gold-Backed Loans Surge as Prices Hit Record Highs Amid Falling Interest Rates

Nepal’s financial market is witnessing a unique double impact: declining bank interest rates and surging gold prices. This combination has boosted the profitability of borrowers taking loans against gold while pushing banks to balance between regulatory limits and market risks.

Gold Reaches Historic Peak

According to the Federation of Nepal Gold and Silver Dealers’ Association, gold prices reached an all-time high of Rs. 248,900 per tola this Wednesday — an increase of Rs. 400 in a single day. This milestone reflects the continuing uptrend in gold’s valuation over the past few months. Silver, however, fell by Rs. 85 to Rs. 3,240 per tola, indicating a divergent trend between the two precious metals.

The continuous rise in gold prices has made many borrowers — who had pledged their gold for loans earlier this fiscal year — substantially wealthier on paper. For instance, those who mortgaged gold in mid-2025 have seen their assets appreciate by 10–15%, resulting in significant notional gains even after paying off their loans.

Gold-Backed Lending Trends

During the first two months of the current fiscal year (Shrawan to Bhadra 2082/83), Nepali banks and financial institutions disbursed Rs. 2.84 billion in gold and silver-backed loans. This figure is slightly lower than the Rs. 3.05 billion recorded during the same period last year — a drop of approximately Rs. 204 million.

However, bankers describe this dip as temporary. The Nepal Rastra Bank (NRB)’s new directive — limiting individual gold-loan exposure to Rs. 5 million — has temporarily moderated lending. Despite this, total outstanding loans against gold and silver have continued to rise, reaching Rs. 87.65 billion by the end of Bhadra, up from Rs. 84.80 billion at the end of Ashad.

This steady growth underscores gold’s continued role as a “safe-haven asset” in Nepal’s financial ecosystem.

Regulatory Oversight and Risk Controls

NRB’s directive issued on Poush 29, 2081, introduced stricter controls to contain speculative lending against gold. Under the new rule, no borrower can take a gold-secured loan exceeding Rs. 5 million. The regulation will remain effective until Ashad 2083, ensuring greater prudence among banks.

Banks are also mandated to verify and authenticate all pledged gold and silver through accredited testing processes. Each borrower’s collateral must be stored in sealed and traceable vaults, with 100% loss provisioning required if the bank fails to comply with testing standards. These measures aim to mitigate operational and market risk associated with fluctuating metal values.

Interest Rate Decline: Boost for Borrowers

In parallel, commercial banks have lowered deposit rates for Ashwin, which indirectly reduced lending rates. The average personal fixed deposit rate fell from 5.577% in Bhadra to 5.4635% in Ashwin, a decline of 0.1135 percentage points.

Lower interest rates have encouraged more borrowing, particularly from clients leveraging gold-based loans. With cheaper credit and rising gold prices, borrowers have enjoyed dual benefits — capital gains on their pledged gold and reduced loan servicing costs.

Macro-Financial Implications

Experts note that this dual trend could further intensify gold-backed lending if gold prices remain stable or continue to rise. Borrowers view it as an opportunity for short-term profit, while banks see it as a relatively secure, low-risk asset-backed loan class.

However, the risks remain real. A sudden drop in gold prices could erode collateral values, exposing banks to potential shortfalls. Thus, while the trend benefits both sides under current conditions, it also demands rigorous risk management and dynamic collateral valuation.

Gold as a Financial Instrument

Traditionally a cultural and investment commodity, gold has now evolved into a financial instrument in Nepal. Many banks offer gold-loan services across urban and rural branches, improving financial inclusion and liquidity access for small borrowers. For banks, these loans ensure secured liquidity; for customers, they provide immediate cash against valuable assets.

Moreover, with slow deposit growth, banks are turning to asset-secured lending like gold loans to maintain profitability and liquidity. Since gold can be easily appraised and liquidated, it remains one of the most efficient forms of collateral.

Analysts forecast that gold prices may continue to climb over the next few months due to strong global demand and limited production. For Nepal, which relies on gold imports, this trend could drive domestic prices even higher, sustaining interest in gold-backed lending.

Yet, experts caution that sustainable growth requires balanced regulation, transparent valuation systems, and periodic stress testing of bank exposure to commodity-backed loans.

Nepal’s financial system is currently navigating a rare convergence of falling interest rates and soaring gold prices. While this scenario has temporarily favored borrowers and boosted short-term liquidity, its long-term sustainability depends on prudent regulation and diversification.

Gold remains a symbol of wealth — but in today’s market, it is also an indicator of how deeply intertwined traditional assets and modern finance have become in Nepal’s evolving economy.