'Gold loan NBFCs may adopt aggressive growth strategies amid competition'

Facing intense competition from banks, gold loan Non-Banking Financial Companies (NBFCs) are likely to adopt aggressive strategies to maintain and expand their gold loan franchise, says a report.

Many banks, both private and public, have become fairly active in the gold loan space, enticed by high yield and liquid security, India Ratings and Research said in a report released on Monday.

For example, gold loan portfolio across banks has jumped by more than 89 per cent year-on-year to Rs 60,700 crore in FY21 and Rs 70,900 crore in the first nine months of FY22.

"Facing intense competition from banks, and absence of any spikes (as seen in the past) in gold prices, (gold loan-focused) NBFCs, especially the ones with a large portfolio, are likely to adopt aggressive strategies to maintain and expand their gold loan franchise," the agency said.

Some of this would reflect in compromising on margins while offering lower yield loans, especially large ticket size loans, to retain customers, incurring higher operating expenditure, and probably driving flexible loan terms, thus impacting operating performance, it said.

Further, the rating agency said the gold loan auctions by NBFCs rose in April-December period of FY22, perhaps the highest since FY14 when gold saw larger volatility in its prices.

NBFCs offering gold loans faced higher auction pressures in the first nine months of FY22, largely due to the COVID-19 impact on borrowers' cash flows and gold price correcting by around 10 per cent during mid-June to September 30, 2021.

"We believe that auctions by gold loan NBFCs would normalise in the fourth quarter of FY22 as gold prices have stabilised since October 2021, after periods of corrections seen since December 2020, along with normalcy returning in business activities," the agency said.

While NBFCs have seen a sharp rise in loan auctions, the situation at banks have been less intensive as the regulations ensure that the Loan-To-Value (LTV) ratio remains lower throughout the tenor of the loans, increasing the incentive for borrowers to arrange for the redemption of gold loans from lenders, the report said.