Banks’ loans against gold jewellery (LAGJ) portfolio could cross the ₹1-lakh crore mark in the next few months, going by the strong year-on-year (y-o-y) growth recorded by them as at June-end 2023.
As on June 30, 2023, banks’ LAGJ portfolio recorded a robust 26 per cent growth (vis-a-vis the July 1, 2022 outstanding) to ₹95,347 crore, per RBI data on sectoral deployment of bank credit.
As on July 1, 2022, growth of the aforementioned portfolio was muted at 1.4 per cent (vis-a-vis the July 2, 2021 outstanding) to ₹75,659 crore.
Also read: Households in Covid-19 vulnerable districts bought more gold during pandemic: IIMA study
Higher yields, low defaults
From March 24 till June 30, banks’ LAGJ portfolio increased by ₹6,919 crore. Going by this run-rate, their portfolio could cross the ₹1-lakh crore mark as early as September-end. Banks are accelerating their focus on LAGJ due to higher yields, lower defaults, and ease of recovery through auction.
For example, State Bank of India offers 9.80 per cent interest rate on multi-purpose gold loans to meet the short-term production/investment credit needs of farmers. For personal gold loans, the bank’s interest rates vary from 8.70 per cent to 9.80 per cent.
On the other hand, ICICI Bank’s mean interest rate (sum of rate of all loan accounts/number of all loan accounts) for gold loans is 15.15 per cent.
PSBs join the bandwagon
BK Divakara, Head-Strategy & Corporate Legal, CSB Bank, said: “Prior to the pandemic, only a few banks, especially from the private sector, were concentrating on this (LAGJ) product. To a certain extent, public sector banks (PSBs) were extending agriculture gold loans because it gets classified as priority sector lending (PSL)…They were active in this space.”
But after the pandemic, banks have recognised that LAGJ is fully secured and the loans may not go bad, said Divakara. So, now almost all banks are into gold loans for agriculture as well as general purpose.
“Banks have seen the potential and created separate verticals. It is highly remunerative. Despite gold being pledged, the rate of interest is high. Normally, in the case of fully secured advances, the rate of interest is lower. But despite having highly liquid security (gold jewellery), the rate of interest for general purpose LAGJ starts at 11 per cent, which is quiet attractive. So, there is quantum jump in gold loans,” he said.
Karthik Srinivasan, Senior Vice-President, Group Head-Financial Sector Ratings, ICRA, underscored that: “Banks have been, of late, becoming aggressive on gold loans. Again, they are targeting more of the agriculture portfolio as it qualifies for the priority sector lending tag... We are seeing some upswing in gold prices. So, a combination of all these things is leading to increase in their portfolio gold loans.”
Upswing in gold prices fetches borrowers higher quantum of loan.