As economic activity picks up after the lockdown is gradually lifted, demand for gold loans is expected to increase. The gold loan assets of the country’s financial companies are expected to grow 15 to 18 percent in the current fiscal year, according to CRISIL.
Demand, especially from individuals to meet urgent personal needs and micro-enterprises for working capital to restart businesses, would propel the growth of gold lending.
Gold loans would be preferred as non-bank financial corporations (NBFCs) and banks have tightened their underwriting standards for other loans. In addition, higher average gold prices mean that gold lending assets under NBFC management could increase by 15-18% in this fiscal year.
Growth was stable in the first quarter of this fiscal year due to low disbursements in April and May due to the nationwide foreclosure. Preliminary estimates indicate that gold loan disbursements, including re-commitments, to NBFCs more than doubled sequentially in the second quarter of this fiscal year, said Krishnan Sitaraman, senior director of CRISIL Ratings.
Unlike other asset classes, gold lending has not encountered any major problems with collection and disbursement, or loan renewals, except for the strict foreclosure phase in April and May.
With many NBFCs facing collection challenges and a likely increase in delinquencies, new disbursements, especially for MSMEs and unsecured loan segments, have remained low. Therefore, financiers of gold loans should benefit from it, he said.
Analysis of NBFC Gold Lending shows that for a typical 12 month loan product, 60-65% of the loan is foreclosed in the first six months. The short duration of most gold loans, the option of partial foreclosure, and the associated discounts offered by NBFCs make them a practical choice.
To ensure a smooth renewal process during a pandemic, the largest NBFCs are offering online renewal since the underlying collateral – gold in various forms – is already in their possession, the rating agency added. .