Gold loans have become one of the fastest-growing lending products in India. Banks and Non-Banking Financial Companies (NBFCs) provide loans against gold jewellery because the process is quick, documentation is minimal, and the loan is secured by gold. However, as the popularity of gold loans has increased, the number of gold loan frauds has also risen sharply. Many banks have reported cases where fake gold, gold-plated jewellery, or adulterated ornaments were pledged to obtain loans, resulting in significant financial losses. These incidents have raised an important question: Why are gold loan frauds increasing so rapidly?
Why Are Gold Loan Fraud Cases Increasing?
Gold has always been considered a safe and valuable asset. As gold prices have increased significantly in recent years, fraudsters have found new opportunities to exploit banks and financial institutions.
Earlier, fake jewellery was relatively easy to identify. Today, fraudsters use advanced techniques to manufacture ornaments that closely resemble genuine gold. Many fake ornaments even pass basic purity tests, making detection much more difficult.
The rapid growth in the gold loan business has also increased operational pressure on bank branches. Employees are expected to process loans quickly, and in many cases, detailed verification is not done. Fraudsters often take advantage of this situation.
The common types of fraud in gold involve gold-plated jewellery and the mixing of gold with other metals. Gold-plated jewellery is one of the most common frauds. Fraudsters use jewellery made of tungsten, copper, silver, brass, or other metals and coat it with a thin layer of real gold. Since only the outer surface contains gold, traditional surface tests may incorrectly identify the ornament as genuine.
How Banks Test Gold?
Most banks rely on gold appraisers who perform physical examinations and basic scientific tests before approving a loan. These gold appraisers are not employees of the banks; hence, their liability is very limited. Our team spoke to various bank employees, gold appraisers, and bank customers to find out the real reasons behind gold loan fraud.
First, we will talk about the most important point: how gold is evaluated and how purity is checked. A customer visits a bank and provides his or her jewellery to the bank manager for a gold loan. The bank manager calls a gold appraiser, and the purity of the gold is checked by the appraiser. Currently, the entire responsibility lies with the gold appraiser. If he passes the gold, then the loan is sanctioned; otherwise, it is rejected. Therefore, the gold appraiser must do his duty carefully. To identify gold purity, most banks have written three methods into their circulars. These tests are the touchstone method, the nitric acid test, and the specific gravity test. We spoke to several bank employees and found that normally only the first two methods are used in banks—that is, the touchstone method and the nitric acid test—while the specific gravity test is not used.
What is shocking is that while these two methods (the touchstone method and the nitric acid test) are widely used in banks, the three tests mentioned in the official circulars are not actually good enough to identify the true purity of the gold. The widely used touchstone test and nitric acid test only test the surface of the jewellery. In the case of the touchstone method, the surface of the jewellery is rubbed against a stone. Upon rubbing the jewellery, if anything blackish or of any other color is found, it means the gold is impure. But through this method, only the surface can be checked. If the gold is mixed with internal impurities, it is impossible to detect. This means if any other metal is mixed inside the gold, we cannot find it out, as only the surface is checked. Therefore, this method is not useful for checking the deep purity of gold.
In the case of the nitric acid test, nitric acid is used, and when it is poured on the jewellery, the colour changes if it contains another metal. But this method also tests only the surface of the jewellery. Unless the surface of the jewellery itself has impure gold, you cannot find out the impurity. Both of these tests are ineffective because normally the surface of impure gold is plated with genuine gold. The real challenge is to determine whether the internal composition of the jewellery consists of pure gold or contains impurities or other metals.
Thus, the tests recommended by the official circulars of the banks are not useful in identifying the true purity of the gold, and this is the biggest reason gold loan fraud is happening in India. No matter how experienced the gold appraiser may be, the true impurity of the gold cannot be found through these two methods alone.
We tried to find out the best method for identifying the purity of gold, and we learned about two methods: the fire assay method and the X-ray fluorescence method. As per the details available on the internet, these two methods are the most accurate ways to identify the purity of gold. The fire assay method is the most accurate method. In this case, gold is melted at very high temperatures, and chemical processes separate the gold from other metals to check its purity. This method provides the highest accuracy of up to 99.99%, and it is the internationally accepted method for precious metal testing. However, because the gold needs to be melted in this method, the best option for banks ends up being XRF (X-ray fluorescence) method. In this test, an X-ray beam is directed at the jewellery. Each metal emits a unique fluorescent signal, allowing the machine to calculate the percentage of gold and other metals.
But this method also has some limitations. A heavily gold-plated object or jewellery with a hidden tungsten core may still require additional testing. In this scenario, there is one more method that can help: an industrial X-ray or CT scan. An industrial X-ray or CT scan cannot directly measure chemical purity, but it can detect impurities or foreign materials inside the jewellery by showing its internal structure. This method can detect hidden tungsten, copper, brass, hollow jewellery, internal cavities, hidden solder joints, mixed metals, and any repairs or alterations. However, this method cannot tell you the exact purity percentage of the gold (whether the gold is 90% pure or 80% pure). It can only find the impure materials hidden inside.
Therefore, banks need to use a comprehensive strategy or a mixture of different tests to properly identify pure gold. Banks should use the XRF method to measure the surface composition and estimate gold purity. Then, banks should use the industrial CT scan method to identify hidden impurities and foreign metals inside the jewellery. Finally, banks should use the specific gravity test to check whether the overall density matches that of genuine gold. Through these combined methods, banks can accurately identify the purity of gold, and the problem of impure gold being pledged in banks can be solved to a large extent.
The second major issue that has been found in gold loan fraud involves the valuer. In several cases, it has been discovered that the gold appraiser colludes with the fraudulent customer. The gold appraiser is not an employee of the bank but an outsider who tests the gold to determine its purity. If the gold appraiser issues a certificate stating the gold is pure, the bank sanctions the loan on the basis of that certificate. If this certificate is fake, nothing can stop the fraud. Normally, banks pay around Rs. 500 to gold appraisers for gold loans up to Rs. 2 lakhs. So, if a gold appraiser evaluates 10 gold loans in a day, he earns around Rs. 5,000 daily. This amounts to roughly Rs. 1.5 lakhs a month. Please note that we have only calculated for 10 gold appraisals; the actual numbers may be much higher, around 50 or 100 a day, in which case the amount paid to gold appraisers increases drastically.
A lot of critics argue that instead of paying such large amounts of money to outside gold appraisers, banks should hire their own employees and provide them with proper training to identify gold purity. Banks could use the money they currently pay to gold appraisers to fund the salaries of these in-house employees. Currently, a gold loan officer and a bank manager are both involved in the workflow. If banks hire a dedicated employee who deals exclusively with gold loans, they can optimize their human resources. A single dedicated person could handle the entire gold loan process, freeing up the loan officer and the bank manager from these tasks.
Conclusion
Practically, most gold loan frauds occur due to two major reasons. First, many banks still rely on traditional gold testing methods such as the touchstone test and nitric acid test, which mainly examine the surface of the jewellery and may fail to detect hidden impurities or foreign metals. Second, banks depend heavily on outsourced gold appraisers, who are not regular bank employees. If an appraiser incorrectly certifies fake or impure gold as genuine—whether due to negligence or collusion—the bank may sanction a loan against jewellery that has much lower value than estimated.
To reduce such frauds, banks should adopt advanced testing technologies such as X-Ray Fluorescence (XRF), Industrial CT Scanning, and Specific Gravity Testing instead of relying only on traditional methods. In addition, banks should consider training and appointing their own dedicated employees for gold valuation rather than depending entirely on external appraisers. A combination of modern testing methods and trained in-house staff can significantly reduce gold loan frauds and strengthen the security of the gold loan process.
So, what do you think of this? Do let us know in the comments section below.
