Gold loan NBFCs set to shine in FY21

New Delhi: With the pandemic-driven lockdowns being lifted slowly and economic activity clawing back, demand for gold loans would rise, especially from individuals meeting urgent personal requirements and from micro enterprises for working capital to restart businesses, Crisil said on Wednesday.

According to a report by the ratings agency, gold loans would be preferred also because non-banking financial companies (NBFCs) and banks have tightened their underwriting norms for other loans, leading to cautious lending to micro and small enterprises, traders and the self-employed.

That, and higher average gold prices year-on-year mean gold-loan assets under management of NBFCs could grow 15-18 per cent this fiscal, the report added.

Gold loan was flat in the first quarter of this fiscal because of low disbursements in April and May due to the countrywide lockdown.

Krishnan Sitaraman, Senior Director, Crisil Ratings, said: "Unlike other asset classes, gold loan has not faced major issues in collection and disbursement, or re-pledge of loans, barring in the stringent lockdown phase in April and May. With many NBFCs facing collection challenges and a likely increase in delinquencies, fresh disbursements, especially to the MSME and unsecured loan segments, have remained low. Consequently, gold-loan financiers are expected to benefit."

"Preliminary estimates indicate that gold loan disbursements, including re-pledge, at NBFCs have more than doubled sequentially in the second quarter of this fiscal."

The Reserve Bank of India recently relaxed the loan-to-value (LTV) for gold loans given by banks. While this is expected to benefit banks focused on gold loans, any substantial weaning away of customers of large gold loan NBFCs will hinge on banks replicating the quick turnaround time, seamless disbursal process and flexible foreclosure options with interest rebate that the NBFCs are known for, and their customers are used to.

The monthly static pool analysis of Crisil-rated gold loan NBFCs shows that for a typical 12-month loan product, 60-65 per cent of the loan is foreclosed within the first six months. The short tenure of most gold loans, the part-foreclosure option and associated rebates offered by NBFCs make them a convenient choice. To provide a smooth re-pledging process in times of pandemic, larger NBFCs are offering online renewal since the underlying collateral - gold in various forms - is already in their possession.