Gaurav Garg
Gold is a highly liquid asset, so consumers can leverage it effectively to meet their liquidity needs. Lenders provide loans by securing gold assets as collateral. Compared with the rest of the world, in India the gold loan market is big business. Until a 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 banks and non-banking finance companies (NBFCs), coming in, which now command more than 60 percent of the market.
The organized gold loan market has grown at a CAGR of more than 30% from 2010 to 2019. NBFCs have been a major driving force behind this growth given their extensive network, faster turnaround time, higher loan-to-value ratios and the ability to serve non-bankable customers.
While the cost of funds increased for most NBFCs with banks becoming cautious about lending to the other NBFC sectors, these gold loan NBFC’s saw financing costs ease out for them. These companies also enjoy other benefits such as low leverage, pricing power and a highly liquid collateral, which would ensure easy access to bond markets as well as bank funding.
The competitive advantage of this sector is that the average tenure of gold loans is 4-5 months at the max which implies that they have good receivables. With dynamic quantitative management by lowering loan to value (LTV) ratio and loan advances they can manage their growth cycle even in this economic slowdown conditions.
If we were to have a look at their risk cycle, we see that for the NBFCs in gold loan business, when they lend to us, their risk weight is at 100 percent. Now, with their harmonization with asset finance companies, they also get the benefit of external rating agencies. If we consider Manappuram Finance, it is currently a ‘AA’ rated company and its risk weight has come down from 100 percent to 30 percent due to the above mentioned reasons.
The growth of unsecured Loans by FinTech Companies to people without credit history is somehow a threat for the sector but Credit needs of large rural population is still not met despite the presence of Micro Finance entities. So, the gold loan sector still looks very promising for the coming years.
(The author is Head of Research at CapitalVia Global Research Limited- Investment Advisor.)
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