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Why gold loans witness surge in demand, is it sustainable?

Thursday, April 13, 2023

With gold touching record high, financial institutions are witnessing a surge in demand for gold loans. Here’s the detailed analysis of the rush behind gold loans, seekers of gold loans and the industry outlook:
After hitting a low of 50,885 rupees in September 2022, gold prices have hit a fresh record high of 62,475 rupees for 10-gram gold this week. The surge in gold prices augurs well for gold financing financial institutions, as they seen continuous growth in business momentum.
Gold has always served as a hedge against inflation. With the current macroeconomic volatility, geopolitical tensions flaring and equity markets giving less single-digit returns, people are flocking to buy the yellow metal as it is considered to be a safe haven.
“In the last three months, 15% of AUM growth has come from the gold loan segment” says PE Mathai,CEO, Muthoottu Mini Financiers Ltd. Sahibandhu, a gold loan aggregator has also witnessed a 9%-12% month-on-month growth. Vighnaharta Gold Pvt Ltd saw a massive 200% growth in their AUM over the last one year.

Also read: Explained India's gold loan market, share of NBFCs and Banks
What’s the rush behind gold loans?
Getting loans for greater value
As the price of gold increases, it gives borrowers an additional opportunity to get more value from the gold that has been pledged to the bank. This way, borrowers can receive more for the same amount of gold kept with the bank as collateral. “That same 1,00,000 rupees has become 1,10,000 right now. So, from a customer perspective, for the same asset they are getting 10% more, hence the demand from that proportion has grown” says Rajesh Shet, CEO and Co-Founder  of Sahibandu.
Secured and risk free
Gold loans are considered to be one of the safest and most secured loans that a bank can offer. The risk of lenders is mitigated because of the collateral. Additionally, borrowers, who typically found it cumbersome to keep their gold ornaments at home due to safety concerns, can now rely on banks for their safety. “RBI also raised the LTV from 75% to 90%. That 90% relaxation was given only to banks and they realized that this is one product which is 100% secured and 75% loan to value (LTV) gives them that cushion even if a small portion goes towards default, they don’t lose.” adds Rajesh Seth.
Gold loans provide flexibility around amount, interest rates and repayment periods. Moreover, gold loans are easily accessible to even those who have no credit history or have lower cibil score.
Source of demand for the gold loans
Many of the gold loan players said that the demand for gold loans is coming from a diverse range of individuals ranging from lower to upper middle class.
“ While traditionally, gold loans were more popular in rural areas, the demand is now also high in urban areas, particularly among small business owners and self-employed individuals who require quick access to liquidity” says Mahendra Luniya, Chairman, Vighnaharta Gold Pvt. Ltd.
Sahibandu has seen 75% of the demand coming from Tier 3 and rural areas on their platform.
“There is a good holding of loans with the upper class, which were hesitating to give to banks and NBFCs due to security and other concerns. However, that is  now changing” says PE Mathai of Muthoottu Mini Financiers.
Will disbursals for gold loans continue to rise?
“As long as a large part of India remains outside the ambit of formal finance, the potential will remain and all players in this space will be able to coexist, despite competition. So, there is little possibility of a plateauing of demand.” says V.P. Nandakumar, MD and CEO, Manappuram Finance Ltd.
With more and more use cases emerging, people are taking gold loans for travel,  education, personal reasons,marriage and even for margin money, in case the loan falls short while buying an asset. Additionally, with growing economic turmoil and uncertainty, there is a need for short-term liquidity, which will eventually lead to a price hike.
Outlook for 2023
RBI data shows that gold loan disbursement has doubled from Rs.46971 crores in September 2020 to 80,617 crore rupees in September 2022. This figure is expected to touch one lakh crore rupees this year. The opportunity is huge, and it is evident with banks entering this space and giving a stiff competition to NBFCs.
“Banks and NBFCs are creating a market by transferring customers from unorganized sector to organized sector.Hence, they are not fighting but supplementing each other. NBFCs usually cater to a ticket size of 50000 to 75000, but banks may not be a big player in that.” says PE Mathai.

V.P. Nandakumar, of Manappuram adds,“Competition has always been there but if new players have entered the fray in a big way, this itself means that there  is good potential for gold loans. As long as a large part of India remains outside the ambit of formal finance, the potential will remain and all players in this space will be able to coexist, despite competition.”
Even in the international market, gold prices continue the dream run with prices touching as high as $2010 this week, as compared to $1600 in November 2022.
Banks gaining an edge in gold loan rush
Traditional gold loan firms, such as Muthoot Finance and Manappuram Finance, are losing market share to banks, including SBI, HDFC Bank, and Canara Bank, which benefit from an established, low-cost deposit base. Muthoot Finance and Manappuram Finance saw 5% expansion and 9% contraction YoY, respectively, in gold loans through December 2022, while banks' gold loans rose by a range of 19% to 54%. Industry experts suggest banks have an edge in faster turnaround times and better loan rates.
Mumbai: Traditional gold loan companies, such as Muthoot Finance and Manappuram Finance, are striving to maintain their market share which appears to be increasingly headed in favour of traditional banks, which have the theoretical advantage of costs due to an established, low-cost deposit base.
Historically, a rise in gold prices led to faster growth in gold loans for these two south-based financiers, but the script appears to be slightly different this time. Hence, investor interest, too, has remained muted.
Gold loans for Muthoot Finance and Manappuram Finance, India's two largest gold financing NBFCs, respectively expanded 5% and contracted 9% year-on-year in the December quarter. By comparison, gold loans for CSB Bank, Canara Bank, SBI, HDFC Bank and Federal Bank, which have a strong presence in the southern markets, climbed in the range of 19-to-54%.
Industry experts told ET that increased focus, faster turnaround time and better loan rates appear to have tilted the scales in favour of the traditional high-street banks.
Among the lenders, CSB Bank appears best placed and makes for the best bet for those investors buying into the gold-loan theme and benefiting from the  current gold cycle.
First, the bank has been aggressively increasing its portfolio of gold loans which expanded by 60% in the December quarter. Second, gold loans are a significant portion of the overall portfolio - 45% as against 20% three years ago.
Higher gold loans have also allowed consistent improvement in the margins and NPAs (non-performing assets). The net interest margin (annualised) for CSB Bank has risen from 5.4% a year ago to 5.8% in the December 2022 quarter and is expected to increase further. Operating profit for the quarter was up 31% year-on-year and net NPA was down to 0.42% from 1.36% a year ago.
On the valuation front, too, the CSB stock appears attractive. It is available 1.6 times its book value and less than 9 times its price to earnings.

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