Non-banking finance companies (NBFCs) will likely see robust growth of nearly 15 per cent in the gold loan business in the current financial year, despite the recent regulatory actions taken by the Reserve Bank of India (RBI).

“We have always been guiding for 15 per cent AUM (assets under management) growth every year, but due to robust growth in Q1FY25, we are being asked why are we not revising the guidance. We would like to do the revision after Q2FY25. Things are looking very bright,” George Alexander Muthoot, MD of Muthoot Finance, told businessline.

Muthoot Finance’s consolidated asset under management (AUM) grew 28 per cent year-on-year (YoY) in Q1 to ₹98,048 crore. Its average loan-to-value ratio (LTV) was at 68 per cent according to current gold prices.

Regulatory Challenges

The optimism comes despite the RBI in March barring IIFL Finance from sanctioning gold loans due to non-adherence with regulations that say that NBFCs cannot extend more than ₹20,000 in cash while disbursing gold loans. The central bank also said that IIFL Finance did not follow the 75 per cent LTV ratio norm while extending gold loans. The regulator reportedly also sent a letter to select NBFCs to follow the cash disbursement norms strictly.

“Whatever irregularities were there in some companies were flagged by the RBI and action has been taken. Focused and serious players like us in gold loans will not have any adverse impact. In fact, it is good to see RBI taking actions against erring companies,” Muthoot said.

The majority of NBFCs who extend gold loans have moved away from disbursing more than ₹20,000 in cash, said the chief of a large NBFC. Any incremental money over ₹20,000 is transferred only through online banking channels like IMPS or RTGS, he said.

Raman Agarwal, director at FIDC — an NBFC industry body — says that the RBI’s action against IIFL Finance was a “one-off event” and that the gold loan business of NBFCs will continue growing in double digits.

“Whatever actions the RBI has taken would be on account of compliance-related issues by the concerned regulated entity. However, this certainly cannot be construed to be an industry-wide issue. Generally, we all know that demand for credit is high and gold loans remain a pretty robust area of lending. It’s business as usual, of course, backed by greater use of technology,” he said.

Gold Resilience

A CRISIL Ratings analysis of gold-loan NBFCs accounting for over 90 per cent of the industry assets under management (AUM) indicated that growth for gold-loan NBFCs has also been supported by favourable movement in gold prices. Moreover, given their robust risk management practices, these NBFCs are well placed to handle adverse gold price fluctuations as seen in the past few weeks, the agency said.

Further, previously up to 95 per cent of gold-loan disbursements by NBFCs were in cash, essentially to provide quick service to borrowers. However, since the RBI action, NBFCs have smoothly transitioned to digital channels with only a slight increase in turnaround time, which has helped them maintain their edge over banks.

Sanjay Agarwal, senior director at CareEdge Ratings, shared similar views. “Post the RBI action, most gold loan NBFCs are disbursing loans digitally. Such NBFCs have been growing since some years based on higher gold prices with little or no increase in tonnage. That will continue and we expect that these NBFCs will post 12%-14 per cent growth in the current fiscal, largely due to higher gold prices,” he said. He, however, added that the intense pricing war in the gold loan NBFC industry could impact margins going ahead.

Malvika Bhotika, director at CRISIL Ratings, said that even as gold loan NBFCs have been grappling with gold prices, which have declined after the reduction in customs duty announced in the full Union Budget for this fiscal, it has not affected gold-loan NBFCs LTV ratio materially.

Per CRISIL, the portfolio loan-to-value (LTV) range for gold loan NBFCs was low at 60%-65 per cent as of June 30, which provided an adequate cushion to manage unfavourable movement in gold prices. Further, as these NBFCs have typically focused on periodic interest collection, the LTV has been kept in check.

However, any sharp fall in gold prices and their sustenance at the lower level for long would bear watching, the rating agency said. To mitigate this risk, aside from periodic interest collection, gold-loan NBFCs would need to monitor LTV closely and conduct auctions in a timely manner.

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