Demand for Gold Loans Surges Over 20% in June

Demand for gold loans is on the rise despite a curb on cash-based disbursement and fluctuation in gold prices. An analysis by rating agency Crisil showed that gold loans grew more than 20% in June over May 2024.

Most banks and NBFC have maintained an LTV (loan-to-value) ratio of 60-65% despite regulatory requirements of 75% which gave them a cushion when gold prices fell after the import duty was lowered in the budget.

"Early evidence of growth momentum is seen in the disbursements for June 2024, which were 12% higher than the average monthly disbursements in the preceding quarter," said Ajit Velonie, senior director, Crisil Ratings.

"Excluding one large player, the growth was even higher at 23%."

Gold-loan NBFCs account for over 90% of the industry assets under management (AUM).

According to the rating agency, growth for gold-loan NBFCs has also been supported by favourable movement in gold prices. Moreover, given their robust risk management practices, these NBFCs are well placed to withstand adverse gold price fluctuations as seen in the past few weeks, it said.

The May advisory from the Reserve Bank of India (RBI) to a few gold-loan NBFCs recommended adherence to the provisions of the Income Tax Act.

That meant loans cannot be disbursed in cash in excess of ₹20,000. Anything more has to be disbursed through the banking channels such as the National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS) or the Unified Payments Interface (UPI).

Following the RBI directive, Crisil Ratings, had indicated that the shift to digital channels for gold-loan disbursements could impact growth in new disbursements. Previously, up to 95% of gold-loan disbursements by NBFCs were in cash - essentially to provide quick service to borrowers.

Since then, NBFCs have smoothly transitioned to digital channels with only a slight increase in turnaround time, which has helped them maintain their edge over banks, Crisil said.

"The declining gold prices have not affected gold-loan NBFCs materially for two reasons. One, the portfolio loan-to-value (LTV) range for these NBFCs was low at 60-65% (on mark-to-market basis) as on June 30, 2024, which provides adequate cushion to manage unfavourable movement in gold prices. Two, these NBFCs have typically focused on periodic interest collection, keeping LTV under check," said said Malvika Bhotika, director, Crisil Ratings.

Any sharp fall in gold prices and their sustenance at the lower level for long would bear watching, the rating agency said. To mitigate this risk, aside from periodic interest collection, gold-loan NBFCs would need to monitor LTV closely and conduct auctions in a timely manner.