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Gold loan non-bank finance companies (NBFCs) are facing strong competition from traditional banks and large NBFCs in the high-value loan segment, resulting in loan growth challenges, according to India Ratings and Research (Ind-Ra). In addition, these NBFCs which are primarily focused on gold loans also face tough competition from the unorganized moneylender market, as evidenced by the limited increase in tonnage among major gold loan NBFCs, the rating agency said.
Moreover, there has been an increase in operating cost for gold financiers due to the rising competition and headwinds in building assets under management per branch for Gold loan NBFCs.
Factors Affecting Gold Loans
Gold prices have played a significant role in driving growth for gold loan non-bank finance companies (NBFCs) over the years. The other two factors have been net customer addition, and loan-to-value (LTV) ratio, the rating agency said.
In the past 12 months ending May 2023, gold prices have increased 16% and gold loans have become attractive for retail customers as they can borrow a higher amount against the collateral. Consequently, gold loan AUM of gold loan NBFCs grew at 8.1% YoY growth in FY23, but the corresponding tonnage declined 1.8% during same period.
Besides, customer additions at large gold financiers have been tepid over the years, compared to small players who have benefited with branch expansion.
Higher Operational Costs
Gold loan processing are operationally intensive compared to other loan products due to their small ticket size, emphasis on quick turnaround time, and reliance on cash collections. Further, a gold loan branch serves only 2-3 km in a particular locality and limits the potential for scaling up the AUM at the branch level given the stiff competition, which also weighs down on the profitability, the rating agency said.
Ind-Ra added that operating costs increases as the NBFCs have to ensure the security of collateral, including storage and surveillance of gold as it is susceptible to risks of theft that can lead to unwanted losses.
NBFCs also have to incur cost to adequately cover the risk of losing collateral through insurance along with rising employee cost, Ind-Ra noted. With competition intensifying from banks and fintech companies, the rating agency said gold loan NBFCs need to improve their visibility in rural areas and boost their product reach to customers through aggressive marketing efforts, further adding to their operating expenses.
Outlook and Observations
Ind-Ra said that the competitive landscape remains aggressive, especially from banks, leaving limited scope for net interest margin improvement in the near term. The rating agency noted that large gold loan NBFCs have witnessed sharper pressure on yields in regions where they directly compete with banks and fintechs.
However, Ind-Ra stated that NBFCs with large portfolio had adopted aggressive strategies to maintain and expand their gold loan franchise. This includes offering lower yield loans despite margin compression, particularly in large ticket size loans, incurring higher operating expenses, and selectively offering flexible loan terms to ensure customer retention.
The rating agency concluded that banks which have low cost of fund advantage have been the biggest beneficiary of the rising trend in gold prices, leading gold NBFCs to enter into co-lending arrangements with them for high-ticket gold loans to drive customer retention.