Big banks zero in on gold loans, line up cheaper rates for bigger market pie

Big banks have stepped up their marketing efforts and are offering cheaper rates to grab a bigger slice of the gold loan market in India, which has been dominated by non-banking finance companies (NBFCs).

Big banks have stepped up their marketing efforts and are offering cheaper rates to grab a bigger slice of the gold loan market in India, which has been dominated by non-banking finance companies (NBFCs).

For instance, the country's largest private sector lender, HDFC Bank, has grown its gold loan portfolio 16 per cent to Rs 39,126 crore year on year (y o-y) in FY23 from Rs 32,870 crores in FY22.

Public-sector lender Bank of Baroda reported a 62 percent y-o-y growth in its gold loan portfolio as its portfolio grew to Rs 2,069 crore in the quarter ended December 2022 as against Rs 1,277 crore a year ago.

Similarly, Kerala-based CSB Bank’s gold loan book soared 51 percent in the quarter ended December 2022 to Rs 8,780 crore from Rs 5,825 crore a year ago.

Analysts bullish

Anand Dama, Senior Research Analyst, Emkay Global Financial Services said HDFC Bank has started to work aggressively on gold loans as it does not affect the lender’s asset quality.

It has identified branches with potential gold loan demand.

On the other hand, traditional gold loan firms like Muthoot Finance and Manappuram Finance saw either marginal growth or a fall in their loan growth portfolio due to a range of reasons.

Also read: Why is yellow metal’s glitter not rubbing off on this gold-financing NBFC major?

The gold loan portfolio of Muthoot Finance for the quarter ended June 2022 was at Rs 56,200 crore, which grew marginally to Rs 56,800 crore in the December 2022 quarter.

Similarly, Manappuram Finance’s gold loan portfolio at the end of the June 2022 quarter was Rs 20,100 crore, which fell to Rs 18,100 crore in the December 2022 quarter.

"Not much gold price growth was seen in the first nine months of FY23, which affected core gold loan NBFCs’ business. Also, there is a branch restriction on NBFCs, which in turn has not worked well for their business,” said Jinay Gala, Associate Director, India Ratings and Research.

Aggressive approach

The competition, experts said, is becoming aggressive as banks are looking at a structural change in the gold loan segment and are exploring partnerships with smaller NBFCs.

“In the last one-two years, banks have started focusing on the gold loan segment. They are partnering with smaller NBFCs to enhance their gold loan portfolio,” said Sudhakar Prakasam, Director, BFSI, Care Ratings.

Also: Gold loans: Banks and NBFCs that offer the lowest interest rates

Regulatory changes also helped banks to expand their gold loan footprint.
The RBI, in August 2020, increased the permissible loan-to-value ratio (LTV) for loans against the pledge of gold ornaments and jewellery for non-agricultural purposes from 75 percent to 90 percent for banks. This was done to mitigate the economic impact of the pandemic on households, entrepreneurs and small businesses.

“This move by the RBI allowed banks to lend more against gold ornaments and jewellery, and helped them to boost their portfolio,” Dama said.

The rate war

Another factor that has hurt NBFCs is cheaper loan rates offered by banks to gold loan customers, analysts said.

NBFCs typically borrow 60-70 per cent of their fund requirements from banks. With a rise in interest rates, their cost of funds has gone up by at least 100-120 bps, said analysts. But these firms aren’t in a position to increase their lending rates correspondingly due to tight competition.

Also read: Tight regulations, rising cost of funds can pose challenges to NBFCs, say experts

For instance, HDFC Bank offers gold loans at an average interest rate of 11.35 percent. On the other hand, Manappuram Finance charges an average interest rate of 15 percent and Muthoot Finance lends gold at an average interest rate of 22 percent.

Traditionally, NBFCs have had the upper hand in the gold loan market as customers typically approach these companies due to their flexibility and timely disbursals.

But RBI’s latest sectoral credit growth data showed that bank lending to loans against gold jumped 20 percent y-o-y to Rs 87,882 crore till February 2023, from Rs 73,193 crore in February 2022.

Experts said though NBFCs offer ease and quick disbursals, customers are looking at banks as an option due to cheaper rates.

“There is an advantage for NBFCs as they disburse loans quickly but banks charge lesser interest rates on gold loans, which has attracted more borrowers,” Dama said.

Gala said interest rates have gone down due to competition from banks in the high-ticket gold loan segment catering to urban customers where NBFCs pricing has been impacted by 100-200 bps. "This competition from banks and branch restriction has affected their market share,” he said.

Banks expand through fintechs

To counter NBFCs, banks have been expanding to far-flung areas of the country through tie-ups with fintech and smaller NBFC partnerships as well, analysts said.

In February 2023, the Central Bank of India partnered with MAG Finserv, a fintech company, to provide gold loans. Other than public sector lenders, private sector lender IndusInd Bank has partnered with Indel Money to lend against gold.

Noida-based private sector lender Shivalik Small Finance Bank has signed a partnership with Trucap Finance for retail gold loans. Muthoot Finance also partnered with Airtel Small Finance Bank to offer gold loans through the Airtel Thanks mobile application.

Prakasam of Care Ratings highlighted that partnerships are due to a higher return on total assets (ROTA) for NBFCs than banks.

“Banks are now focusing on more partnerships with NBFCs and fintechs as they can put their services out to the market flexibly,” said Prakasam.