Indian Banks and Non-Bank Financial Corporations Continue Gold Rush in Lending Market

Indian financial institutions have found gold, literally, as the COVID-19 pandemic has triggered an increase in jewelry loans since early 2020.

The rate of growth of these loans could slow as gold prices weaken and pressure on household budgets eases. But analysts say banks and non-bank financial corporations, or NBFCs, could increasingly exploit Indian consumers sitting on a $ 1.5 trillion treasure trove of yellow metal, according to estimates from the World Gold Council, the global market development organization for industry.

Gold investments in Indian households are mostly in the form of ornaments which are passed down from generation to generation. The World Gold Council expects the gold lending market to grow at an annual rate of 15.7% to reach 4.617 trillion rupees in the fiscal year ending March 2022, from 3.448 billion rupees in the fiscal year ended March 2020.

“Because gold loans are backed by liquid collateral almost equivalent to cash, the credit risk angle is largely supported.” VP Nandakumar, CEO and Managing Director of Manappuram Finance Ltd., an Indian NBFC, told S&P Global Market Intelligence. People across India have a traditional affinity for gold ornaments, which makes them sentimentally attached to jewelry which is often heirloom heirlooms. “This emotional connection to jewelry has an additional deterrent effect on default and makes gold loans different from any other type of commodity loan,” Nandakumar said.

Demand for gold jewelry fell 34% to 1,411.6 tonnes in 2020, led by mainland China and India, the world’s biggest consumers, according to a Jan. 28 report from the World Gold Council. However, the demand for loans against gold jewelry in India has increased, aided by the rise in prices of the yellow metal and as household budgets were stressed due to the pandemic. After declining in the first quarter of 2021, gold prices have recovered in recent weeks. COMEX spot gold was listed at $ 1,865.94 per troy ounce on June 14, down from $ 1,941.53 at the start of the year and a record $ 2,063 in August 2020.

“As banks and NBFCs seek to extend credit, these loans, taken out for both business and emergency purposes, have gained more attention. [The] The rally in the price of gold since 2019 and the bullish outlook have also contributed to the popularity of this form of credit among lenders and borrowers, ”said Somasundaram PR, Managing Director for India at the World Gold Council, in an email to Market Intelligence.

Financial institutions are also considering gold lending as a way to access the large customer base to cross-sell other financial products. The formal sector was previously less effective in diverting clients from the unorganized gold lending market, primarily neighborhood jewelers who typically act as pawn shops. Their branches often lacked staff who could assess the value of gold jewelry, and the relatively small size of the banknotes was a barrier. Now, several lenders offer home services for appraisals and for filling out paperwork.

Consulting firm KPMG said in a 2020 report that total gold loans outstanding in the organized sector in 2019 were estimated to be 5.5% of total household gold holdings in India. Organized lenders are estimated to account for 35% of the gold lending market share, with unorganized lenders accounting for the remaining 65%, according to KPMG.

This “offers organized players a huge opportunity for growth,” said Nandakumar. The organized gold lending market has the potential to double its assets under management over the decade. Manappuram’s gold lending assets grew 24% in 2020, he said.

India’s largest asset lender State Bank of India reported 465.08% year-on-year growth in gold lending to Rs 209.87 billion for the fourth quarter fiscal year ended March 31. Bank of Baroda said its retail gold lending grew 152.52% year-over-year in the fiscal fourth quarter to 11.01 billion rupees.

According to data from the Reserve Bank of India, outstanding loans against gold jewelry among banks reached 604.64 billion rupees in March, up from 185.96 billion rupees at the start of 2020. Total bank loans grew at a relatively calm pace of 8.3% during the period.

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Informal sector lenders typically charge between 18% and 24% annual interest on gold loans, which can reach 36% for very small amounts. By comparison, public banks often offer loans as low as 7.5% per annum, although the rate is generally higher among NBFCs and private sector lenders, according to a comparison table on the web portal. local

However, the organized sector may never capture all the gold loans. Banks do not have readily available gold appraisers in their branches and the grip of the informal sector is still strong, especially in rural areas. Some clients prefer to have gold loans in their neighborhood and may be reluctant to travel long distances carrying their valuables. Proximity to the lender is often more important than the interest rate.

Borrowers often look for gold loans in an emergency, which is why the speed of disbursement is also important. Banks need more time to appraise gold jewelry, as they often rely on external appraisers.

As India recovers from a deadly wave of COVID-19 cases, gold lending for businesses could be boosted in 2021. “A large chunk of gold lending is used for business purposes. We expect them to experience healthy growth with improving economic activities. Part of the growth will also be determined by prevailing gold loan prices, ”said Alpesh Mehta, research manager at Motilal Oswal Financial Services.

“The initial phase of economic recovery will be positive for gold lending due to the resumption of business activities requiring urgent short-term borrowing. Gold will remain a default option in this case,” Mehta said. .

Priscilla C. Carnegie