"We are dealing in a commodity which is only becoming more attractive. We often come across such instances where people pledge fake gold, stolen or low quality gold with us. Whenever possible, we recover the amount, otherwise we just have to bear the losses," said George Alexander Muthoot , MD, Muthoot Finance.

With a surge in the number of institutions which offer gold loans, companies say there is an almost proportionate increase in the probability of a fraud as a greater number of people are now aware of gold loans. "Earlier if there was one case of fraud in the 30,000 people we gave loans to, today it is one in every 10,000 cases that we see discrepancies," said Unnikrishnan Manappuram, MD, Manappuram Finance, another prominent player in the gold loan business.

"Unfortunately spurious and low purity gold is being detected not only with financial institutions, but the market in general. Still the number of such cases are within anticipated averages," said George Lamannil, executive director and general counsel, Muthoot Pappachan Group, the parent company of Muthoot Fincorp.

Industry pegs the amount of gold in Indian households at 20,000 tonnes, of which less than 1% has been monetized by organized sector. Most gold loan companies today boast of a y-o-y growth of 80% in their loan books, with a growing demand coming from places beyond south India, where gold loans have been popular.

Manappuram Finance's profits more than doubled for the half year ended September, 2011.Despite growing popularity , ensuring complete safety of the precious metal continues to be difficult. "Our audit staff verify gold in every branch. But complete assurance is impossible ," said Muthoot.