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Banks, NBFCs slug it out in the gold loan market

Thursday, December 29, 2022

After losing their market share to banks in the gold loan segment by almost 10% in FY21, non-banking financial companies (NBFCs) have been able claw back marginally in FY22.
However, major gold loan players such as Muthoot Finance and Manapuram Finance believe that there is still enough space for both banks and NBFCs to grow because of the market size. However, the strategies adopted by the players in the face of this competition might vary significantly.  
For Muthoot Finance, providing high level of customer service is the key to hold on to customers, according to its managing director George A Muthoot. On the other hand, VP Nandakumar, MD & CEO of Manappuram Finance, believes that as large areas of the country are still under-banked, banks and NBFCs have enough legroom to expand in untapped geographies.
Manappuram Finance, which has around 5,200 branches, will increase its network to consolidate its market in existing locations. Muthoot Finance, which has a strong base in rural and semi-urban areas, has so far opened 100 branches, out of the 150 branches approved by the Reserve Bank of India (RBI) in July.    
The unorganised sector has a higher share of 65% in the gold loan segment, organised players, including banks and NBFCs, represent the remaining 35% share, according to a KPMG report in 2020.
The RBI, in a report on Tuesday, had said that NBFCs are facing stiff competition from banks, especially in the vehicle and gold loan segments, which are typically considered core areas of the shadow banks. Banks have captured some market share from NBFCs in past couple of years, as the share of the former increased to almost 40% in FY21 from 31% in the previous year. However, with the dispensations given by the central bank on the loan-to-value (LTV) front, the non-bank lenders managed to wrest some market share back from the bank by FY22, the RBI report shows.
Other than banks, other NBFCs such as IIFL Finance and Shriram Finance are also expanding in the gold loan business. Shriram Finance is looking to bet big on the gold loan segment and is in the process of setting up necessary infrastructure in the next 12 to 18 months at some of its existing branches, YS Chakravarti, MD & CEO, said.
However, being a niche segment, building up gold loan vertical requires some amount of time along with knowledge of factors such as customer requirements, well-trained manpower, gold price movements, stress levels in income and established players have an edge in those aspects, said Nandakumar.
“Well established financial entities often hold more preference amongst the customers in terms of good brand reputation, proven track record, security and fraud protection. That is a generic way of perception of the people. In this regard, we may have some edge in the market,” Muthoot said.      
Muthoot Finance and Manappuram Finance are also looking to hedge their bets by diversifying into non-gold segments while keeping focus on gold loan segment. Manappuram Finance, consolidated assets under management (AUM) of `30,665 crore, is looking to increase non-gold book to 50% from current levels of 37% of the total book. The company’s non-gold portfolio consists of vehicle, MSME and micro-finance loans. Muthoot Finance, with AUM of `64,356 crore, has 11% of its total book in the non-gold loan portfolio.

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