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Gold loan-based Non-Banking Financial Companies (NBFCs) like Muthoot Finance, Manappuram Finance, etc. are witnessing slower growth in its gold loan franchise due to fierce competition from banks.
Rating agency CARE in a report said that Gold Loan NBFCs reported an AUM growth of 20.8% in FY21 compared with 82% growth in gold jewellery loans witnessed by banks during the same period. The strong performance by banks can be primarily attributed to relaxation in Loan-To-Value (LTV) rule for banks till March 2021 as well as increased focus of banks on gold loan segment.
Similarly, India Ratings and Research (Ind-Ra) said in a report that gold loan portfolio across banks has jumped by more than 89 per cent year-on-year to Rs 60,700 crore in FY21 and Rs 70,900 crore in the first nine months of FY22.
CARE said that banks continued to report relatively high loan growth of 22% annualised in 9mFY22 as compared to 3% growth achieved by gold loan NBFCs due to various reasons. One of the reasons is stiff competition from banks, especially in higher value gold loans. On the other hand, aggressive recovery steps including auctioning taken by some of the large gold loan NBFCs post significant fall in gold prices in Q4FY21.
Meanwhile, Ind-Ra said gold loan-based NBFCs, especially the ones with a large portfolio, are likely to adopt aggressive plans to expand their gold loan franchise. Some of the strategies would be offering lower yield loans leading to less margins, big ticket size loans to retain customers, incurring higher operating expenditure, and probably driving flexible loan terms, thus impacting operating performance, the agency added.
Going forward, with gold loan NBFCs focussing on growth, CARE estimates AUM of gold loan NBFCs to witness 6% growth during FY22 and 11.4% in FY23. Sustained rally in gold prices pose upward risk to CARE’s growth estimates.
One of the stocks to watch is Muthoot Finance Ltd. The company has a strong presence in rural India which accounts for about 65 per cent of total gold stock in the country, and the large portion of the rural population had limited access to credit. This is likely to help the company in improving their LTV ratio as gold prices surge. Other NBFCs that have strong gold loan portfolio are Manappuram finance and Bajaj Finserv. Among banks, Federal Bank, SBI, HDFC and ICICI are aggressive players in this segment.