At a time when banks are rapidly increasing their market share in the gold loan market, non-banking financial companies (NBFCs) are extending their operations in rural and semi-urban areas. In addition, they are also diversifying into other areas.
In addition to adding more gold loan branches in the under-banked segment, gold loan-focused NBFCs like Manappuram Finance are also looking to increase the size of their non-gold portfolio, say bankers.
“There is a huge unorganised segment that lies outside the ambit of formal financial institutions. This will ensure that margins do not come under pressure. Our interest rates are still much lower than what is available in the unorganised sector,” says V P Nandakumar, managing director and chief executive officer, Manappuram Finance.
Nandakumar believes that since most of its customers are from the bottom of the pyramid and seek small-ticket, short-term loans, the key for them is faster and hassle-free disbursal—a bid advantage over banks.
However, the gold loan market is still dominated by the unorganised sector. The unorganised segment, like moneylenders and pawnbrokers, holds 65% of the market share in the gold loan segment. Banks and non-bank lenders contribute to 35% of the gold loan market, a 2020 report from KPMG showed.
NBFCs have been facing stiff competition from banks in the gold loan segment in recent years, with the market share of non-bank lenders falling to 61.2% as of March 2022 from 69.4% as of March 2020, according to data from the Reserve Bank of India (RBI).
In recent months, the demand for gold loans has surged along with the rise in gold prices. Banks have been able to grow their loan book sharply in this time-frame due to their ability to garner funds at a lower cost.
Bank loans against gold jewellery have risen to Rs 84,300 crore as of December 31 from Rs 24,900 crore as of March 31, 2019, data from credit rating agency ICRA showed. NBFC gold loans have risen to Rs 1.3 trillion as of December 31 from Rs 70,500 crore as of March 31, 2019.
Even though the interest rate charged by banks is lower than that charged by NBFCs, these two categories of lenders cater to a different set of gold loan customers, and they also tend to differ on ticket size, say experts. While NBFCs operate with a ticket size of Rs 1 lakh and below, the average ticket size of banks is higher.
Hence, non-bank lenders are better equipped to cater to the under-banked segment than banks due to the former’s reach into semi-urban and rural areas and speedy loan disbursal process.
“Banks do not lend to everyone. Banks typically lend to existing customers. Gold is something where proximity is very important. You do not carry your gold for 4-5 kilometres.” Umesh Revankar, executive vice-chairman, Shriram Finance said.
“Small businesses who want quick service are more inclined to approach a non-bank lender instead of a bank, as these customers generally take loans for a short tenure, like a couple of months. These customers prioritise convenience over the interest rate.”
Shriram Finance’s total branches have risen to 2,901 as of December 31 from 2,820 a year ago, with a majority of the lender’s branches located in rural and semi-urban areas.
Manappuram Finance’s gold branches rose to 3,950 as of December 31 from 3,773 a year ago. Its non-gold branches also rose to 1,253 as of December 31 from 1,178 a year ago. “If we look at the gold loan business, the sector is offering margin despite increased competition,” Rajesh Sharma, managing director, Capri Global Capital, said, adding that the limited formal borrowing avenue has increased the opportunity for both NBFCs and banks to meet the aggravated demand.