Why Gold Loans Keep Shining During These Troubled Times

Gold makes up a large part of India’s household wealth and this asset has come in handy during the period of financial stress caused by the pandemic. The demand for gold loans has been strong in the past fiscal year and the trend will continue in 2021-22.

The demand for gold loans from micro-businesses and individuals – to fund working capital, Crisil said in a recent note.

According to data from the Reserve Bank of India, loans against the gold jewelry portfolio of the proposed commercial banks increased 59.1 percent to 63,770 billion yen as of September 24, 2021 from 40,086 billion yen in September 2020 September 2019 to 28.163 billion.

Q2 payouts

Banks’ second quarter results show continued demand for gold loans, while gold-focused non-bank financial firms also said there was still a robust appetite for these loans.

“We remain optimistic about gold credits. Gold credit is up 26 percent since the start of the year and we forecast 25 to 30 percent growth for gold credit this fiscal year, ”said Shyam Srinivasan, managing director and CEO of Federal Bank after the second quarter results.

Private sector gold loan disbursements by lenders rose to 15,976 billion yen for the quarter ended September 30, 2021.

CSB Bank also reported an increase in gold loans of 10.3 percent over the previous year for the second quarter of the financial year.

The second quarter results of the gold lending focused NBFCs – Muthoot Finance and Manappuram Finance – should shed more light on this trend, but analysts said they likely saw good growth.

“We anticipate healthy growth in the gold loan portfolio for Manappuram Finance and Muthoot Finance given the various attractive interest rate programs that these gold financiers have put in place to attract high entry price gold loan customers. As gold prices have remained stable, we expect gold financiers to give their customers (especially those who continue to pay the interest component) a respite to repay their gold rather than rush to auction their gold, ”according to a recent Motilal report Oswal.

IIFL Finance reported on March 30th

Will growth continue?

Umesh Mohanan, Executive Director and CEO of Indel Money, pointed out that the economy is back on track but many sectors are still badly hit.

“People trying to reopen or restart their business are in dire need of cash, and for that this gold loan is a convenient and quick option that does not require a credit check. Gold is actually becoming an alternative capital option, ”he said.

Indel Money has posted 25 percent year-over-year growth in gold loans and expects demand to continue. The average ticket size for loan is 75,000-85,000 yen and the average term is 1 year.

Experts point out that small business owners, many of whom have benefited from the moratorium or restructuring, may now have trouble getting a loan from the bank.

In this case, gold loans prove to be a sensible option.

VP Nandakumar, Managing Director and CEO of Manappuram Finance, said, “As the disorganized sector bounces back on its feet, we expect better growth in gold lending, microfinance and our other businesses.”

Assets under management (AUM) of non-bank financial firms (NBFCs) that primarily offer loans for gold are expected to grow 18-20 percent this fiscal year to ₹ 1.3 million, according to Crisil’s forecast.

PSBs lead

According to a recent report by ICICI Securities, the organized gold lending industry, including agricultural lending, has grown even faster since 2018-19, with growth of nearly 31 percent in 2020-21 due to the cautious stance of financial institutions in other credit products due to the pandemic-hit economy and higher gold prices.

Public sector banks held the largest market share in the organized gold lending industry (excluding agricultural loans) at around 44 percent in 2017-2018, compared to 34 percent of specialized NBFCs and 12 percent of private banks.

The report estimates that banks’ market share in the organized gold lending industry, including agricultural loans, increased from about 73 percent in fiscal 2019-20 to about 75 percent over the 2020-21 period.

“If the banks’ stake vis-à-vis NBFCs in the organized gold lending industry, including agricultural loans, is observed, the banks stake in FY2020-21 is estimated to be due to the increased LTV or loan-to-value and risk aversion of banks to other loan products increased ”, it stated.

However, the busy nature of the business, existing well-distributed infrastructure across India, and a well-established customer base provide strong business trenches for specialized NBFCs, it said.

Online gold loans are also catching up now.

Federal Bank said in its investor presentation that payouts through fintech-enabled gold and microcredit platforms have exceeded 3,800 billion yen.

Recently, Rupeek, the asset-backed digital lending platform, signed an agreement with South Indian Bank, headquartered in Kerala, as its lending partner to provide online gold lending services. However, the service is initially available in limited cities.

Gold prices, repayments

Experts note that gold prices have been stable, which has resulted in low borrower delays and has helped NBFCs outperform banks in this business.

“While there was a slowdown in gold prices in the second half of FY21, with gold prices falling about 10 percent from their August 2021 peak, the decline has moderated over the year to date in 2021-22,” ICRA said, adding Gold Loan -NBFCs have reported low Gross-Net-Performance-Assets (GNPAs) since FY 2017-18.

Many NBFCs are also revising the typical one-year term for gold loans to shorter terms of three months or six months.

Gold bond auctions, which saw a surge earlier this year, should also normalize as economic conditions improve.

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About Natalee Broderick

Natalee Broderick

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