The Glittering world of Gold Loan NBFCs

Gold enjoys a vital space in the hearts and homes of Indians and is often considered as the symbol of financial security, social status and cultural legacy. Gold is a highly liquid asset and universally accepted commodity, the consumers can leverage it effectively to meet their liquidity needs. Lenders provide loans by securing gold as collateral.

Compared with the rest of the world, in India the gold loan market is big business. Until two decade back, most of the lending was in the unorganized sector through pawnbrokers and money lenders. However, this scenario is changing with the organized sector players, such as Non-Banking Finance companies (NBFCs), which now command more than 60 percent of the market.

The research report showed that the gold jewellery kept as collateral against gold loan by top three gold loan NBFCs — totalled 298.8 tonnes at end of the last fiscal year. The outstanding gold loan NBFCs value have increased exponentially in the last decade from just Rs 11,530 crore in FY10 to Rs 76,000 crore in FY20, at a CAGR of impressive 20.8 per cent.

The Non-Banking Financial Company (NBFC) segment is expected to gain positive momentum in 2021 as overall loan disbursement and business have improved of late, with the same momentum expected to continue into 2021.  Many gold loan NBFCs had seen healthy growth as gold loans were being preferred by customers. Overall, loan defaults have also reduced and are expected to drop further as the economy shows positive recovery.

In 2021, many NBFCs will continue to see growth in rural product loans, especially agricultural products and primary services. Besides this, gold loans NBFCs will continue to do well as unlike other asset classes, gold loans had not faced any major issues in collection and disbursement, or re-pledge of loans. NBFCs with a niche presence and strong pricing power are likely to witness margin expansion in 2021.

Although global gold prices are forecasted to reduce over the long term, the gold loan market is expected to demonstrate high growth potential, as banks are being more selective and stringent in credit disbursement. Unlocking new geographical areas, like rural areas, will also add to the growth story.
Gold loan NBFCs will continue to be the frontrunners with quicker decision making and faster adoption and capturing new markets – which gives them a natural advantage over banks.
 

By Manoj Toms