Gold loans – a win-win option for banks, clients


Gold jewelry loans seem to be a real goldmine for banks, given the rapid growth of their portfolio in 21 fiscal years.

This is supported by the fact that the banks’ portfolio increased 81.6% year on year (YoY) to Rs 60,464 as of March 26, 2021, up from Rs 33,303 as of March 27, 2020, according to the Reserve bank. India Data (RBI).

The growth of bank loans for a portfolio of gold jewelry can be compared to a gold rush.

The portfolio grew 33.9% YoY as of March 27, 2020 compared to March 29, 2019, an outstanding figure of Rs 24,866.

These figures are based on data from the Reserve Bank of India on bank loans from a select 33 planned commercial banks (SCBs), which account for about 90 percent of the total non-food loans provided by all SCBs.

Covid positive

Demand for gold loans surged after the March 2020 pandemic outbreak as the economy swayed under its impact, resulting in job losses, wage cuts and increased emergency healthcare costs.

Small businesses used these loans after a six-month Covid moratorium, either to ensure continued operations or to resume operations that had to be temporarily closed due to the lockdown.

These loans have helped individuals and small businesses stay on top during these difficult times.

Moreover, the RBI also played a role by liberalizing the rules, resulting in banks doubling their gold loan portfolios.

To mitigate the economic impact of the pandemic on households, entrepreneurs and small businesses, the central bank in August 2020 increased the loan-to-value (LTV: Loan-to-Asset Value) for non-agricultural gold jewelry and jewelry loans from 75% to 90%. % until March 31, 2021

Increased gold price

With higher LTV and higher gold prices, borrowers could get more loans per gram of pledged gold.

The competitive interest rate was the icing on the cake, with public sector banks such as Bank Maharashtra and State Bank of India charging 7.35% and 7.50%, respectively.

The aforementioned factors have helped banks penetrate deeper into the business segment, which has traditionally been dominated by gold lending companies such as Muthoot Finance and Manappuram Finance.

For example, in FY21, the State Bank of India’s individual loan portfolio secured by gold jewelry grew 465 percent YTD to Rs 20,987 as of March 31, 2021 from Rs 3,715 last year. the beginning of the financial year.

Bank Maharashtra’s gold portfolio of retail loans grew approximately 11-fold in fiscal 21 to approximately RR 1,370 crore.

Bank of Baroda’s retail gold loan portfolio more than doubled from Rs 436 as of March 31, 2020 to Rs 1,101 as of March 31, 2021.

Total lending for gold by the Federal Bank and CSB Bank increased by 70% YoY (to Rs 15,816) and 61% YoY (Rs 6,131), respectively, in fiscal 21. However, details of the growth in retail gold lending were not available.

Immediate liquidity

A.S. Rajiv, MD and CEO of Bank of Maharashtra (BoM), noted that his bank has not explored the full potential of gold lending in the past. Thus, the Bank has revised the gold lending scheme, making it more convenient, competitive and customer-friendly.

“Given the challenging times, when many individuals and small businesses were underfunded, the gold loan was instrumental in providing immediate liquidity.

“Our (total) portfolio of gold loans has grown (approximately 7 times in 21 fiscal years) to Rs 1,939 in March 2021 and is now over Rs 2,100,” he said. Rajiv added that BoM’s portfolio will grow to Rs 5,000 by the end of this fiscal year.

VR Rajendran, Managing Director and Chief Executive Officer of CSB Bank, highlighted in a recent income statement that a significant portion of his bank’s additional advances in fiscal 21 were in gold loans. About 76 percent of the advance was driven by an increase in gold loans.

“Last time, the growth of our gold loan was so good because NBFCs were not active in this area at all. After the client leaves NBFC and comes to the bank, he will no longer return to NBFC, because the bank has a better offer and very good rates.

“So, everything that we have acquired during this period, we will keep. This pandemic will probably also help us attract more new customers from a higher segment, which should be good for us. This is an advantageous offer for the borrower; it’s a win-win situation, ”Rajendran said.

Zero capital requirement

Considering that the loan is fully collateralized, has less risk of default and zero capital charges, it is an attractive product for lenders.

Banking expert V. Viswanathan noted that since gold is an acceptable collateral, there are no capital requirements for loans against gold jewelry and jewelry. In addition, since these loans are fully secured, they can be returned (without court intervention) through an auction.

He invited banks to consider introducing a “simple cash flow statement” for one year to determine the maturity period and the available equivalent monthly payments (EMI). If the inflow of funds is small, they must authorize the interest-only gold loan and renew the principal annually.

Viswanathan said borrowers can overcome the liquidity mismatch with gold loans at low interest rates. There is no need for follow-up to obtain the loan. In addition, there is no need to look for money to pay off as gold covers the loan.

So far in FY22, gold jewelry loan growth has slowed relatively to 33.8% YoY on May 21, 2021, down from 86.3% YoY on May 22, 2020.

Given the impressive growth in portfolio loans for gold jewelry in fiscal 21, it remains to be seen if bankers will continue to maintain Midas’ relationship with the portfolio in fiscal 22.

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