Gold loan volumes surge to record highs amid Covid crisis in India | Economic Times

Mumbai: The safety vaults of leading gold finance companies and banks are filling up fast as cash-strapped individuals walk in to pawn household jewellery to save the day. The top seven gold financing companies (GFCs), which include Manappuram Finance Ltd, Muthoot Finance, IIFL Finance Ltd, Shriram City Union and Kosamattam Finance, are holding a record loan book worth Rs 85,000 crore, according to data collated by Care Ratings, as small business owners, people who have not been paid by their employers and the ones who are not able to earn their daily wages in the face of the lockdown are pledging family gold to raise funds.Rising gold prices—from Rs 2,800 per gram in early-2019 to Rs 4,620 per gram currently—is encouraging banks and GFCs to lend more on the yellow metal. That apart, borrowers are also getting “better value” for the gold pawned.“Most of April was bad as we were not able to open our branches,” said George Alexander Muthoot, MD of Muthoot Finance. “But towards last week of April and first week of May, we could open over 95% of our branches. During this period, we have seen maximum number of people coming to us for loans.” Banks too are enjoying this windfall and are estimated to be holding gold loans worth Rs 2.35 lakh crore. But GFCs feel they are far more efficient in disbursing loans. “They may have access to bank funding, but bank loans take time. They come to us for bridge loans—till the time they get long-term bank funding,” Muthoot said.A gold loan is a secured debt for the lender. The loan disbursed is on the basis of quality of the pledged gold and its current market value. As per RBI guidelines, lenders are allowed to give loans up to 75% of the market value (‘loan-to-value’ or LTV in banking parlance) of the pledged gold. “The sharp run-up in gold prices is a major positive as it allows customers to borrow more against their existing pledges,” said VP Nandakumar, MD & CEO of Manappuram Finance. “Other lenders have also turned risk averse. In such times, gold loans become the default option for many borrowers who are denied access to credit by regular lenders.” Average tenure of gold loans is 4 to 6 months, with delinquency rates less than 0.1%. As a segment, gold loan portfolios log gross NPA levels in the range of 1.2-1.5%, making it one of the safest credit products for most lenders. The ‘turnaround time’ (time taken to disburse a loan) for these loans ranges from 15 minutes to a few hours, provided the customer’s KYC is in proper order. Gold loans are considered the quickest and easiest way of fulfilling the borrower’s financial needs as compared to other forms of loans.Large banks like Canara Bank and Federal Bank are competing with nimble-footed GFCs to corner more market share within the gold loans segment. Canara Bank recently launched a gold loan campaign with reduced interest rates at 7.85%. Federal Bank, with gold loans worth Rs 9,500 crore, offers a range of gold loan-specific services from door-step loans to overdraft facility, bullet payment and EMI options. “Traders, farmers, shopkeepers and small business owners now need cash to restart operations,” said D Vijaya Kumar, GM at Canara Bank, which has disbursed close to 400,000 gold loans amounting to Rs 3,700 crore in the recent months. “Product innovation will help us capture more market,” said K Mohan, VP & country head (agri, micro & rural banking) at Federal Bank.The gold loan segment is heavily dominated by unorganised players such as local moneylenders. A few PSU banks, some mid-sized private banks and about 20 mid- and small-sized GFCs make up for the 35% organised players in the gold loan segment. But then, gold loan, as a product segment, is expected to grow further in the months to come. Consulting firm KPMG predicts gold loan market to be valued at Rs 4.6 lakh crore by 2022.“Gold loan book grows in tandem with global gold prices… We expect gold prices to increase 10 - 15% in the medium term; this is going to fuel more demand for gold loans,” said P. Sudhakar, an analyst tracking gold at Care Ratings.While the volumes of fresh loans are rising, there is an increasing trend among borrowers to redeem gold pledged by them a few months ago. “Savvy borrowers are releasing old pledges to sell the gold in open market to take advantage of higher prices,” said Nandakumar of Manappuram.Ends... Ends...