Organised gold loans by banks and non-bank lenders are expected to cross Rs 10 lakh crore in the current fiscal and hit the Rs 15 lakh crore mark by March 2027, according to a report by rating agency ICRA.

Banks remain dominant driven by their gold jewellery-backed agriculture loans, the report said adding that non-banking finance companies (NBFCs) at the same time hold the pole position in retail gold loans and are expected to expand at 17-19% in FY 2024-25.

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.

Gold loans grow 25% CAGR over FY2020-24

Overall organised gold loans expanded at a compounded annual growth rate (CAGR) of 25% over the period FY 2020-2024, driven by banks, which expanded these loans at a higher CAGR of 26%, while the NBFCs expanded theirs at 18% during the same period, according to ICRA.

Bank gold loans growth was driven by agriculture loans backed by gold jewellery, which grew at a CAGR of 26% during FY2020-FY2024, while their retail gold loans grew by 32% on a lower base, it said. Consequently, the share of the NBFCs reduced during this period, which were largely focussed on retail gold loans for consumption or business purposes, ICRA report revealed.

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Public sector banks account for 63% gold loans

“Public sector banks (PSBs) accounted for about 63% of the overall gold loan in March 2024, up from 54% in March 2019, while the NBFC and private banks’ shares moderated by equal measure during this period. The NBFCs, however, continue to hold a stable share in the retail GL over the last 3-4 years.” ICRA expects NBFC gold loan to expand at 17-19% in FY2025 and projects it to grow at a CAGR of 14-15% during FY2026-FY2027.

“Over the recent past, NBFC gold loan 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 gold loan book growth revived in FY2024 and the trend is expected to continue into FY2025,” A M Karthik, Co-Group Head, Financial Sector Ratings, ICRA Limited said.

Growth in gold loan book of NBFCs is largely driven by the gold prices as the branch additions and the tonnage of gold jewellery held as collateral grew at the modest pace of 3-4% vis-a-vis the 18% growth in the loan book during FY2020-FY2024 for the larger players, the report said.

The NBFC gold loan book is quite concentrated, with the top four players accounting for 83% share in March 2024; this, however, declined from 90% two years ago as some of the existing players have diversified to this segment and some newer players have emerged, it added.

“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, staying well below 0.5% in the last five years. Access to collateral and the liquid nature of the same reduce the lender’s credit risk. In case of loan overdue, lenders undertake timely auctions, which have helped in healthy realisations,” the report said.