Non-banking financial companies (NBFCs) focusing on gold loans are expected to see growth in disbursements this fiscal on strong demand for credit, said a report by CRISIL Ratings. In the recent past, their growth has been underpinned by operational resilience, agility and adaptability to evolving regulations. A key regulatory development this fiscal was the advisory in May 2024 that curbed cash disbursements, the report added.
Growth for gold-loan NBFCs, CRISIL said, has also been supported by favourable movement in gold prices. Moreover, given their robust risk management practices, these NBFCs are well placed to withstand adverse gold price fluctuations as seen in the past few weeks.
CRISIL Ratings analysed gold-loan NBFCs accounting for over 90 per cent of the industry assets under management (AUM), to reach these conclusions.
“Early evidence of growth momentum is seen in the disbursements for June 2024, which were ~12 per cent higher than the average monthly disbursements in the preceding quarter. Excluding one large player, the growth was even higher at ~23 per cent,” said Ajit Velonie, Senior Director, CRISIL Ratings.
The May advisory from the Reserve Bank of India (RBI) to a few gold-loan NBFCs recommended adherence to the provisions of the Income Tax Act. That meant loans cannot be disbursed in cash in excess of Rs 20,000. Anything more has to be disbursed through the banking channels such as the National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS) or the Unified Payments Interface (UPI).
Following the RBI directive, CRISIL Ratings, in its credit bulletin dated May 21 had indicated that the shift to digital channels for gold-loan disbursements could impact growth in new disbursements. Previously, up to 95 per cent of gold-loan disbursements by NBFCs were in cash — essentially to provide quick service to borrowers.
Since then, it added, NBFCs have smoothly transitioned to digital channels with only a slight increase in turnaround time, which has helped them maintain their edge over banks.
“To be sure, NBFCs have been grappling with gold prices, which have declined after the reduction in customs duty announced in the full Union Budget for this fiscal. Even so, the declining gold prices have not affected gold-loan NBFCs materially for two reasons. One, CRISIL Ratings estimates the portfolio loan-to-value (LTV) range for these NBFCs was low at 60-65 per cent (on mark-to-market basis) as on June 30, 2024, which provides adequate cushion to manage unfavourable movement in gold prices. Two, these NBFCs have typically focused on periodic interest collection, keeping LTV under check,” said Malvika Bhotika, Director, CRISIL Ratings.
CRISIL Ratings concluded that any sharp fall in gold prices and their sustenance at the lower level for long would bear watching. It also added that aside from periodic interest collection, gold-loan NBFCs would need to monitor LTV closely and conduct auctions in a timely manner in order to mitigate this risk.
