Confidence in these banks has since tumbled, with the latest fears resurfacing in June when a primary mortgage lender delayed bond interest payments, indicting credit markets are freezing across the country.

The situation has led to a rapid rise in borrowing costs, forcing non-bank financial companies (NBFC) to tighten lending practices. This has stressed out Indian consumers, who are desperate for loans, now willing to pledge and or even sell their gold for lines of credit.

Reuters interviewed Indian farmer Babasaheb Mandlik, who was refused a farm loan from a major state-run lender; he was forced to pawn his wife's gold jewelry as collateral so that he could use the funds to manage his 8-acre cotton farm in western India.

"Pawning the jewelry was a difficult decision as my wife likes to wear it at festivals and weddings," 50-year-old Mandlik told Reuters.