Competition is heating up among non-banking financial companies (NBFCs) and commercial banks for distribution of gold loan as demand surges after a lull induced by the second wave of Covid-19 this year.
Over the years, NBFCs have cornered the major share of the gold loan business; banks have lagged behind although the latter charge lower interest. But as more people are increasingly finding gold loans an easily accessible and reliable form of short-term credit, banks have started aggressively pursuing it.
Last year, the arrival of the pandemic rattled the gold-loan business, which rebounded in the second half as lockdowns were lifted and gold prices escalated. The second wave of the pandemic again threw a spanner in the works, forcing NBFCs to reduce the interest rates to minimise defaults.
Some offered loan renewals with lower interest while others enticed customers with special interest rates for the Diwali season.
V P Nandakumar, managing director and chief executive officer of Manappuram Finance Ltd, says the decline in interest rates is the outcome of the monetary easing by the Reserve Bank of India as part of its response to the disruptions caused by the pandemic
“In gold loans, which are typically short- term and small ticket loans, interest rates are not necessarily the most important factor considered by borrowers. The ready availability of gold loans and the ease with which it may be availed also matter a lot. Further, the demand for gold loans at any point of time is largely driven by the state of the economy, particularly the unorganised sector and the rural economy,’’ he said.
Rural boost
In recent months, there has been a sustained uptrend in the rural economy and the unorganised sector is also getting back on its feet after the disruptions caused by the second wave. That has once again sparked demand for gold loans, he added.
From an average of 18%, NBFCs reduced interest rates to about 14-15%. On the other hand, the banks were wooing customers with interest rates ranging from 6.5% to 13%.
“What we have seen is people seeking low ticket loans from Rs 3,000 to Rs 75,000 usually go to NBFCs. But high value loan customers seem to prefer banks,’’ said Kiran James, marketing head of Muthoottu Mini.
Banks have been hesitant to promote gold loans aggressively because of higher operational cost. “Typically, the average tenure of a gold loan is four months unlike housing loans which run for 20 or 25 years. Besides, the need for infrastructure to store gold, insurance and external appraiser add to the cost. High ticket loans allow the banks to bring down the operational costs,’’ said C VR Rajendran, MD and CEO of CSB Bank, a private sector lender.
While the average loan size for NBFCs has grown to over Rs 60,000, it has become Rs 1.2 lakh for banks. Rajendran noted that after the pandemic, middle class individuals were seeking gold loans, which have been the popular form of credit among the lower segment. The middle class is likely to seek high-ticket loans.
“If we are successful in attracting more middle class, then gold loans will grow by 3 to 4 times as they have a huge stock of gold with them,” Rajendran said.
Raising service standards
To attract more customers, several banks have raised their service standards on par with those offered by NBFCs. Tomy Augustine has founded a digital platform called mygoldbazzaar.com to help people to take gold loans from the nearest branches of the banks with highest rate per gram and lower interest rates.
“Many are not aware of the fact that several banks are now providing gold loans in 10-15 minutes. We have tied up with three such banks CSB Ltd., Indian Bank and South Indian Bank,” Augustine said.
It can be downloaded as an app and the subscribers enjoy preference in securing gold loans. The startup also provides cash incentive for prompt payment. Augustine, who has launched the app in Kerala, is planning to expand it to other states of South India.
NBFCs have also noticed a change in customer profile.
“A good part of our gold loans is availed by small businesses, micro-enterprises, traders etc. who use it for their working capital requirements. However, during the lockdowns last year and immediately thereafter, we did see more gold loans availed for personal consumption purposes,’’ said Nandakumar.
Some NBFCs like Indel Money have specialised in long tenure gold loans which it says has helped in customer retention. “Our tenure is 1 to 2 years. This has helped us in handholding the customers during crisis. Since the tenure is longer, they get time for paying back the loan and to avoid the auction. If they face difficult times, we tell them to at least pay the interest to keep the gold,’’ said Umesh Mohanan, executive director and CEO of the company.
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