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The Covid-19 pandemic has triggered an unprecedented rise in gold loans since gold is the first item of value most families would pawn in times of financial crisis. Outstanding loans against gold jewellery given by banks rose 82% to Rs 60,464 crore as of March 2021, from Rs 33,303 crore as of March 2020, according to data with the Reserve Bank of India. Banks have also reported a surge in gold loans in the quarter ended 30 June, driven by rising gold prices and risk-averse lenders demanding collateral for loans.

To tap the untapped market, many companies are offering attractive offers to the customers, like 100% waiver of processing fee, attractive interest rate etc. This loan market is still growing and experts feel that at least 10%-15% CAGR in till fiscal year 2026.

Lucrative market

“Southern India is the most lucrative market for gold loans. 50% of our total business came from this region but northern India is most emerging market among others. This market grew multiple fold within a span of only 7-8 years. Currently almost 22% of our total business comes from this part,” said KR Bijimon, chief general manager, Muthoot Finance.

Muthoot Finance is the market leader in gold loan segment with asset under management of approximately Rs 52,000 crore. India has a gold loan market of approximately Rs 1.5 lakh crore.

“Northern India and eastern India are two potential loan markets and we are planning to introduce multiple things to tap these markets,” added Bijimon. He also expects the market to grow by at least 15% in the fiscal year 2021-22.

“Despite the first wave in FY21, our business grew at a rate of 20%. This year also we expect to grow at a pace of 15%,” Bijimon told Money9.

NPA is still a factor

Since the outbreak of the pandemic last year, more and more people took gold loans to fund themselves. The second wave has made repayment tough. Therefore, NPA is also mounting for the banks and NBFCs, said GR Jayakrishnan, chief manager at State Bank of India.

Bijimon also agreed that NPA is certainly a factor but that would not pull the growth momentum.

“We charged minimum interest rate, besides no hidden cost is there. Additionally for the sake of the customers Muthoot offers multiple facilities, so our customers generally repay the loan in time,” said Bijimon.

Unstable gold price

However, with gold prices now hovering at about Rs 4,365 per gram it marks a 20% drop from last year’s peak. During the last year and a half gold price varied between Rs 42,000 and Rs 55,000 for 10 gm.

This unstable price should have a negative impact on gold loan business. But Bijiman refuted the notion and said, “It is true that retail gold price is not stable. But we generally lend for a period of 12 months, 24 months and 36 months. Therefore, this fluctuation has minimal effect,” said the Muthoot executive.

But others differed.

“This unstable price of gold hit us really hard, especially for the small players. Biggies like SBI, Muthoot or IIFL or others can absorb the loss they face, but small players can’t,” said a person from a lending company who is not authorised to speak to the media.

Whether it is Bijimon or Jayakrishnan, everybody is expecting big growth in the gold loan sector in the next couple of years. Muthoot is expecting a growth of 15%, SBI is eyeing more than 20% growth.

Muthoot is able to keep the defaults rate at 0.9% even during the pandemic time.

Normally, NBFCs give 90 days after the repayment period to clear dues and start the auction process after that. In these pandemic times, however, they are trying to delay the auctions.