Indian banks and non-bank financial companies are chasing a gold rush in the credit market



Indian financial institutions have literally stumbled upon gold as the COVID-19 pandemic has caused a spike in jewelry loans since early 2020.

The growth rates of such loans may slow down as gold prices decline and the burden on the population’s budgets decreases. But analysts say banks and non-bank finance companies, or NBFCs, may increasingly be attracting Indian consumers with $ 1.5 trillion in reserves of the yellow metal, according to the World Gold Council, the industry’s global market development organization.

Investing in gold in Indian households is mostly jewelry that has been passed down from generation to generation. The World Gold Council expects the gold loan market to grow at a rate of 15.7% per year to reach Rs 4.617 trillion in the fiscal year ending March 2022, up from Rs 3.448 trillion in the year ending March 2020.

“Because the gold loans are backed by liquid collateral, which is almost equivalent to cash, the angle of credit risk is largely taken into account,” he said. VP Nandakumar, CEO and Managing Director Manappuram Finance Ltd., Indian NBFC, S&P Global Market Intelligence reported. People all over India Traditional affinity for gold jewelry, making them sentimentally attached to jewelry that is often heirloom. “This emotional bond with jewelry acts as an additional deterrent to default and differentiates gold loans from any other form of merchandise lending,” Nandakumar said.

According to a report from the World Gold Council released on January 28, gold jewelry demand fell 34% to 1,411.6 metric tons in 2020, driven by mainland China and India, the world’s largest consumers. However, demand for gold jewelry loans in India has increased, fueled by rising prices for the yellow metal, as well as shrinking household budgets due to the pandemic. After falling in the first quarter of 2021, gold prices have recovered in recent weeks. Spot gold on COMEX was quoted at $ 1,865.94 an ounce on June 14, up from $ 1,941.53 at the start of the year and a record high of $ 2,063 in August 2020.

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“As banks and NBFCs seek to expand lending, such loans, taken both for business purposes and for emergencies, are receiving more and more attention. [The] “The rise in gold prices since 2019 and optimistic forecasts have also increased the popularity of this form of credit among lenders and borrowers,” Somasundaram PR, Managing Director for India of the World Gold Council, told Market Intelligence in an email.

Financial institutions also see gold loans as a way to access a large customer base to cross-sell other financial products. The formal sector has previously been less effective in attracting clients from the informal gold market, mostly from neighboring jewelers, who usually acted as mortgages. Their offices often lacked staff to appreciate the value of gold jewelry, and the relatively small size of the ticket was a hindrance. Now several lenders are offering door-to-door services for appraisal and paperwork.

Consulting firm KPMG said in a 2020 report that the total outstanding gold loans in the formal sector in 2019 is estimated at 5.5% of total household gold holdings in India. According to KPMG estimates, organized lenders account for 35% of the gold lending market, while unorganized lenders account for the remaining 65%.

This “gives organized players a tremendous opportunity for growth,” Nandakumar said. TAn organized gold loan market could double the amount of assets under management within a decade. Manappuram’s gold-loan assets rose 24% in 2020, he said.

The State Bank of India, India’s largest lender by assets, reported a 465.08% increase in gold loans over the same period last year to Rs 209.87 billion in the fourth fiscal quarter ended March 31. Bank of Baroda said retail gold lending rose 152.52% year over year. in the fourth fiscal quarter to 11.01 billion rupees.

Outstanding gold jewelry loans from banks rose to Rs 604.64 billion in March from Rs 185.96 billion in early 2020, according to the Reserve Bank of India. The total volume of bank loans increased by a relatively moderate 8.3% over this period.

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Lenders in the informal sector usually charge between 18% and 24% per annum on gold loans, which can go up to 36% for really small amounts. By comparison, state-owned banks often offer loans at as little as 7.5% per annum, although the rate is usually higher for NBFC and private lenders, according to a comparison chart on local web portal

However, the organized sector will never be able to cover all gold loans. Banks do not have available gold assessors in their branches, and the informal sector remains strong, especially in rural areas. Some clients choose to borrow gold from their neighborhood and may hesitate to travel long distances carrying their valuables. The proximity of the lender is often more important than the interest rate.

Borrowers often seek out gold loans in an emergency, so the speed of the loan is also important. Banks take longer to appraise gold jewelry as they often rely on external appraisers.

As India recovers from a deadly wave of COVID-19 cases, gold loans for business could gain momentum in 2021. “Most of the gold loans are used for business purposes. We expect them to see healthy growth with improved economic activity. “Growth will be driven in part by prevailing gold loan prices,” said Alpesh Mehta, head of research at Motilal Oswal Financial Services.

“The initial phase of economic recovery will be positive for gold loans due to the revival of business activity, requiring urgent short-term borrowing. In this case, gold will remain the default option, ”Mehta said.


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