Banks’ gold loan portfolios get boost in April-June quarter from high yellow metal prices

The rise in gold prices helps borrowers get more credit for the same quantity.

The gold loan portfolios of banks have grown considerably, by 18-52 percent, in the first quarter of the current financial year, as compared to the 12-33 percent growth they recorded in the same period last year.

The growth was driven by the rise in gold prices in the April-June quarter, which increased the loan-to-value of gold loan products in absolute terms, resulting in higher lending in this segment, analysts said.

Loan to value (LTV) refers to the amount a borrower will get in comparison to the worth of gold. Under Reserve Bank of India (RBI) rules, fresh gold loans sanctioned on or after April 1, 2021 have an LTV ratio of 75 percent.

Usually, when gold prices rise, it helps borrowers get extra money as a loan against gold jewellery. This is because the absolute value of their gold increases, even though the LTV ratio remains the same.

“Banks that have traditionally been strong in the gold loan segment, have reported good growth. This could be attributable to the rally seen in the underlying price of gold, which was up nearly 17-20 percent in the last one year itself,” said Aashay Choksey, Vice President & Sector Head, Financial Sector Ratings, ICRA.

Similarly, during an analyst call, B Ramesh Babu, MD & CEO of Karur Vysya Bank, said the bank’s Y-o-Y growth shows that around Rs 2,500 crore had come in. “Maybe something to be aided by the pricing — the gold price has gone up.”

During the reporting quarter, MCX gold prices surged 5-8 percent and traded above the Rs 60,000 per 10 grams mark, according to Bloomberg data.

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The numbers

The banks that have reported sharp growth include Union Bank of India, Bandhan Bank, CSB, Canara Bank, Federal Bank, and Karur Vysya Bank, among others.

According to their investor presentations for the June quarter, Union Bank of India and CSB Bank reported a 52.93 percent and 42 percent on-year rise, respectively, in their gold loan portfolios.

Similarly, Canara Bank registered 29.37 percent growth; Bandhan Bank reported 32.08 percent growth, South Indian Bank: 21 percent, and Federal Bank: 13.3 percent, in their respective gold loan portfolios.

Karur Vysya Bank reported 17.53 percent growth in gold loans during the April-June quarter.

Babu of Karur Vysya Bank added that the majority of gold loans are for 1 year or 2 years, and many are linked to the cropping pattern. The pricing range is between 8.75 percent and 9 percent.

Increase in gold prices

During the April-June quarter, MCX gold prices have increased from around Rs 55,500 in March, to over Rs 60,000 in June, as per Bloomberg data.

The price of gold is increasing due to heightened global uncertainties, the surge in rupee levels and the wedding and festive seasons, analysts said.

Prices have now corrected and are trading at around Rs 59,000 per 10 grams.

According to Sanjay Agarwal, Senior Director, CARE Ratings, gold prices per 10 grams broadly rose from Rs 50,000-52,000 in Q1FY23 to Rs 58,000-60,000 in Q1FY24.

“The rise in gold prices helps borrowers get more credit for the same quantity,”  Agarwal added.

Choksey of ICRA rating noted that higher gold prices support better recoverability, which is a positive for banks.

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Outlook

Analysts expect the pace of lending towards this segment to remain aggressive despite some decline in gold prices.

This is because gold prices remain higher than they were during the second quarter of the previous year, despite the decline in prices.

“Even though gold prices may have eased by 4-5 percent in recent months, a material upside in gold prices seems limited and growth should largely remain range bound, at around 9-11 percent,” Choksey added.

Similarly, Agarwal said, banks will continue to be aggressive in gold loan lending and the segment is expected to see steady growth.