Gold loans see staggering growth in Covid times

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Banks have reported a stunning growth in gold loans amid the pandemic-induced uncertainties. Going forward, they are devising new strategies to focus more on the segment.

For people who have traditionally invested in the yellow metal, the quick processing of gold loans has made it an easy route to raise cash in an emergency.

Though it is a long distance to climb back to the 2020 peak, physical gold prices have seen an 8-10% increase in the new financial year.

Federal Bank, which reported a staggering growth of 70.05% in gold loan portfolio to reach Rs 15,816 crore as on March 31, hopes to achieve 25-30% growth in 2021-22. “There are two reasons. For one, the rupee has appreciated a little. There is an increase in the gold price (per ounce) in dollar value has gone above 1,800,” said Ashutosh Khajuria, executive director, on Monday (May 17), during the earnings press conference.

The bank’s gold loans accounted for around 11-12% of the total loans. “We can go up to 15%,” he said.

Canadian billionaire Prem Watsa-controlled CSB Bank said it is focusing on gold loans. As of now, gold loans contribute 40% of the portfolio and stands at Rs 6,131 crore, a year-on-year growth of 61%. The bank is looking to add around 200 branches in 2021-22 and double its branch network so that there is a proper mix of brick and click banking. This will help it seek growth in newer markets, especially in retail gold loans.

In August 2020, the Reserve Bank of India (RBI) had increased the permissible loan-to-value ratio (LTV or the amount of loan that can be given against the value of the collateral) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75% to 90%. This facility ended March 31.

“Now, we are back to 75%,” said the banker.

This means that customers can walk in with gold ornaments and get a loan of up to 75% of the value of the gold jewellery based on the prevailing prices. They can walk out in less than half an hour with cash.

According to the data with the RBI, outstanding loans against gold jewellery given by banks have shot up 82% year-on-year to Rs 60,464 crore as of March-end. Banks could increase their share in the market vis-à-vis gold-loan NBFCs during the last financial year, thanks to the higher LTV allowed by the central bank.

As the pandemic led to the loss of job and income, gold loans have turned out to be the easiest way to get some cash.

Three leading gold loan NBFCs — Muthoot Finance, Muthoot Fincorp, and Manappuram Finance – are also vying with each other to increase their market share.

Another industry official said the demand for gold loans goes up when the unsecured loans such as personal loans and credit card loans are not easily available.