Gold financiers to benefit from unsecured lending curbs, elevated prices

Gold loan financiers are seen benefiting from elevated gold prices and the slowdown in unsecured lending following the increase in certain risk weights by the central bank.

As banks and NBFCs look to cut their unsecured retail exposure, borrowers are expected to opt for more secured options such as gold loans to meet their funding requirements, industry participants said.

“When the cost of obtaining personal loans and consumer durable loans rises, people will look for asset-backed loans. A significant cut in the unsecured consumer loans will lead to a spike in demand for gold loan, which is secured in nature,” said Umesh Mohanan, Executive Director and CEO, Indel Money.

What is also helping financiers are the elevated gold prices, with the safe haven commodity having seen significant upward price movements throughout the year. Gold prices have rallied 25 per cent to ₹62,335 per 10 gram as on Thursday from an average price of ₹49,944 in the first quarter of this year.

“This upward trend, coupled with the increasing demand for loans, has significantly boosted the gold loan segment. We have witnessed a surge in the number of individuals opting for gold loans, leveraging their existing gold assets to meet their financial needs,” said Mathew Muthoottu, MD, Muthoottu Mini Financiers, adding that demand for gold loans is expected to remain strong going into 2024.

Factors responsible

In a recent analyst meet, Manappuram Finance too said that it expects gold prices to be supported by geopolitical events and low interest rates in the US which will provide an extra layer comfort to the gold loan industry and make gold loan demand largely price-agnostic. The NBFC guided for 8-10 per yoy growth in gold loans, adding that with the revival of economic activity for NBFC gold loan customers, it should be able to revert to 10-12 per cent gold loan growth in a few quarters.

George Alexander Muthoot, MD, Muthoot Finance said demand has also been aided by the recent festive period which spurred consumers’ discretionary spending, adding that the lender witnessed a spike in gold loans to new customers in H1 FY24, reflecting increased adoption.

“Through gold loan overdraft facilities, we have been able to offer credit facility to customers against the collateralized asset allowing them to avail credit whenever they need funds to cover expenses. In addition, the gold price factor has been historically high enabling us to disburse higher credit in the economy,” he said.

Borrowers can take loans up to 75 per cent of the value of their gold as per applicable the LTV (loan to value) ratio. Thus, an increase in gold prices allows borrowers to take higher loan amounts or avail ‘top-up’ loans against the gold already up for collateral.

However, higher capital requirements for gold financiers could pose a challenge to this growth, industry participants said. The RBI directive is expected to impact bank funding to NBFCs, more gold loan NBFCs could be seen tapping the market for funds to support this pace of growth, they said.

Even so, increased distribution of gold loans through digital channels is also aiding growth, which combined with the “prevailing credit crunch” should ensure strong demand, Mohanan said. “One can expect the monetary easing to begin only by mid-2024. So, the cost of credit will remain high for a comparatively longer period, which will aid gold loan NBFCs to expand business.”

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