The organised gold loans by banks and non-banking financial companies (NBFCs) are expected to exceed Rs 10 trillion in the current financial year and are projected to reach approximately Rs 15 trillion by March 2027, stated a report by ICRA. It further added that banks remain dominant driven by their gold jewellery-backed agriculture loans. At the same time, per ICRA findings, NBFCs hold the pole position in retail gold loans and are expected to expand at 17-19 per cent in FY2025. “The moderation in competitive intensity is leading to some expansion in the loan yields of the NBFCs, however their yields are expected to be lower by 200-300 bps than the peak levels seen 4-5 years back,” it said.
The organised gold loans expanded at a compound annual growth rate (CAGR) of 25 per cent over the period FY2020-FY2024 and this was driven by banks which expanded these loans at a higher CAGR of 26 per cent while the NBFCs expanded theirs at 18 per cent during the same period. The gold loans growth by banks was driven by agriculture loans backed by gold jewellery, which grew at a CAGR of 26 per cent during FY2020-FY2024, while their retail GLs grew by 32 per cent on a lower base. Consequently, ICRA said, the share of the NBFCs reduced during this period, which were largely focussed on retail GLs for consumption or business purposes.
Further, public sector banks (PSBs) accounted for about 63 per cent of the overall gold loans in March 2024, up from 54 per cent in March 2019, and the shares of NBFCs and private banks moderated by equal measure during the period. While the NBFCs continued to golf a stable share in the retail gold loan over the last 3-4 years, it is expected to expand at 17-19 per cent in FY2025 and ICRA expects it to grow at a CAGR of 14-15 per cent during FY2026-FY2027.
“Over the recent past, NBFC GL growth trends were influenced by the trends demonstrated by other loan products, namely microfinance, unsecured business or personal loans, which are also targeted at similar borrowers. With intensifying headwinds for unsecured loans, resulting in lower growth vis-a-vis the previous fiscal, and supported by buoyant gold prices, the NBFC GL book growth revived in FY2024 and the trend is expected to continue into FY2025,” said AM Karthik, Co-Group Head, Financial Sector Ratings, ICRA Limited.
Per ICRA, NBFCs recorded growth in gold loan book on gold prices as the branch additions and tonnage of gold jewellery held as collateral grew at the modest pace of 3-4 per cent vis-à-vis the 18 per cent growth in the loan book during FY2020-FY2024 for the larger players. The NBFC gold loan book is quite concentrated, ICRA said, with the top four players accounting for 83 per cent share in March 2024. This, it added, declines from 90 per cent two years ago as some of the existing players have diversified to this segment and some newer players have emerged.
Now, yield pressures faced by the NBFCs in FY2022 and FY2023 have abated to some extent in FY2024, however they continue to remain 200-300 basis points (bps) lower than the peaks witnessed in FY2020/FY2021. Credit costs have remained low. Access to collateral and the liquid nature of the same reduce the lender’s credit risk. In case of loan overdues, lenders undertake timely auctions, which have helped in healthy realisations, ICRA stated.
In order to improve their operating leverage and augment their customer base, entities are steadily augmenting their online lending and a sustained scale-up. The directions restricting cash disbursements (on loans more than Rs 20,000) have not impacted business significantly as entities have been able to adapt to the new requirement.
“Healthy growth outlook, low credit cost and a relatively improved pricing power for gold loan companies support their credit risk profiles. This asset class, however, is highly regulated around various operational aspects, including branch opening, collateral evaluation and storage, auction process, etc. Thus, improving operating efficiencies in view of the above, would be the key and provides scope for the players to further strengthen their earnings performance,” AM Karthik added.