Mumbai: Growing economic uncertainty due to the pandemic has led to a surge in demand for gold loans, with some lenders witnessing up to 30% growth in amounts disbursed. While a large portion of borrowers continue to avail these loans to tide over immediate cash shortage, many lenders are moving away from unsecured credit to gold loans, which provide adequate risk cover against any future default, according to industry experts.
John Muthoot, chairman, Muthoot Pappachan Group, said the drying up of unsecured loans post-lockdown and the moratorium period has pushed borrowers towards gold loans. “While owning gold has always been a boon, the higher prices during this period have helped borrowers get maximum value for their gold. Muthoot Fincorp has disbursed about ₹9,000 crore from April-June, an increase of 30%, from the previous year to almost 2 million customers," said Muthoot. Muthoot Fincorp is one of the non-bank financiers of the Pappachan Group.
Experts said the recent surge in gold prices, which have already touched lifetime highs in domestic and international markets, have also added to current demand, allowing borrowers to raise potentially larger sums against the same quantity of gold. Although data on aggregate gold loan volumes in the system is not available, bankers and executives at non-bank financiers said they have seen a surge in demand especially between March and June.
Moreover, as bad loans are expected to rise by at least 400 basis points (bps) in FY21, lenders seem more comfortable with secured loans, where chances of recovery are greater. Mirroring a 1.8% decline in total non-food credit between 27 March and 19 June, personal loans, an important category of unsecured loans, was down 3.4% to ₹7 trillion in the same period.
Gold prices have soared 31% between 1 April and 31 July, allowing customers to get more money in loans from their jewellery. The price of 10 grams of gold stood at ₹53,615, as per MCX Gold Spot data sourced from Bloomberg. However, the loan to value (LTV) ratio for gold loans has been capped at 75% by the Reserve Bank of India. This essentially means that customers can get a maximum of 75% of their value of gold as loans.
Shyam Srinivasan, chief executive, Federal Bank said gold loans is one of the focus areas of the banks, and it grew 10% sequentially and about 36% on a year-on-year (y-o-y) basis.
“We are getting new business also, and existing customers are also taking more. Moreover, gold price is high and customers need cashflow," Srinivasan said on the bank’s investor conference call on 15 July. Then there are others who do not want to miss the bus. Fino Payments Bank aims to double the value of its gold loan sourcing business in FY21. Since payments banks cannot lend, Fino is looking to partner banks and NBFCs to source gold loans on their behalf.
Amit Jain, head (alliances and PMO) at Fino Payments Bank said in a statement on 28 July that it expects the demand to grow in FY21 as people turn to gold loans for their personal and working capital requirements. “We aim to do over ₹2,000 crores of gold loan referral business this fiscal," said Jain. Experts believe that although there's drop in disbursements by non-bank financiers in FY21, gold loan will be a saving grace as demand for that category of loans will continue.
“The silver lining, however, would be gold loans, which constitute around 5% of the assets under management (AUM). Growth here is seen to be relatively higher as more individuals and micro enterprises go for it to meet immediate funding needs," said Krishnan Sitaraman, senior director, Crisil Ratings.