Amid a muted overall credit growth in the banking sector, gold loans have emerged as the only segment witnessing strong traction. Rising gold prices have further boosted customer demand.
Small finance banks are actively ramping up efforts to seize the opportunity and scale up gold loan portfolios by adding branches and deploying more employees on ground. This also marks a shift from unsecured lending to secured loan books.
“We look forward to scale up the gold business. We would like to cater to customers in three segments – consumption purpose, business expansion and income generation – primarily focusing on business banking clients through overdraft and tailored offers. It will help unlock capital by shifting towards secured assets, thereby improving liquidity and capital efficiency,” said Murali Vaidyanathan, senior president and country head – branch banking, Equitas Small Finance Bank.
As per the RBI data, loans against jewellery grew 117% in August, compared with 40% a year ago. Outstanding gold loans stood at Rs 62.13 lakh crore as on August 22.
“Rising gold prices have increased our focus on growing the gold loan business. Currently, we operate through a network of approximately 350 branches offering gold loans. We are actively working to expand this footprint and enhance presence to capitalise on emerging opportunities in the market,” said Vibhas Chandra, head – micro banking and gold loans, Ujjivan Small Finance Bank.
As some small finance banks are facing stress from the microfinance sector, lenders are trying to diversify portfolios by adding secured products, where gold loan is an attractive segment.
“We plan to expand across existing outlets and asset centres by deploying more staff. Since gold loans require a strong on-ground presence, our approach will be resource-driven and operationally focused,” said Vaidyanathan.
Gold prices have significantly surged, reaching record highs in India due to global demand and expectations of rate cuts by the US Fed. International prices touched a record high of $4,194 per ounce on Wednesday. Domestic prices rose to over Rs 1,30,338 per 10 gram, according to Bloomberg data.
As gold prices carry market risks, portfolio risk management becomes essential for lenders by tightening their credit underwriting practices. “We currently limit top-up loans to avoid mark-to-market risks, given the narrow LTV margin. We maintain a high average ticket size and ensure the portfolio LTV stays below 75%,” said Vaidyanathan.
According to the final guidelines issued in June, the RBI raised the maximum loan-to-value (LTV) ratio for loans below Rs 2.5 lakh to 85% from 75%. The LTV for loans between Rs 2.5 lakh and Rs 5 lakh was increased to 80%, while the same for loans above Rs 5 lakh remains unchanged at 75%. The regulator also removed credit appraisal and end-use monitoring requirements for smaller-ticket loans.
Besides small finance banks, scheduled commercial banks are also trying to expand gold loan portfolios to make the best use of the opportunity.