Are gold loans likely to fill the lending gap?

Gold loans may be uniquely positioned to capitalize on post-COVID demand; especially for individuals and small business clients. An expanded branch network and a strong digital footprint may just be the recipe to capture this extra market share.

May 08, 2020 02:05 IST India Infoline News Service

COVID-19 is creating a unique problem of funding availability. Banks may be flush with liquidity but are unwilling to lending except to blue chip borrowers. Clearly, the traditional unsecured loans like personal loans are getting harder to come by and lenders are looking beyond mere credit scores. This has created a unique problem for individuals and small businesses struggling to raise money. One option that has emerged is gold loans.
 
Economics of the gold loan market in India
 
The organized gold loan market is estimated to be around Rs467,000cr in India according to KPMG estimates. This is approximately 35% of the gold loan market with commercial banks, NBFCs and small finance banks being the key players. The unorganized segment is twice as large. There are two major opportunities that organized gold loan players perceive at this point of time. Firstly, the predominance of unorganized money lenders in the gold loan business is a major opportunity to bring them under the regulated ambit. This ensures lower rates of interest and tighter RBI regulation. Secondly, out of the 22,000 tonnes of gold that Indian households currently own, only 5% has been pledged for raised loans. This is a huge opportunity to monetize gold holdings. This is more so in rural pockets!
 
Time to make the best of the gold accretion effect
 
Muthoot Finance has been a preferred stock among institutions for quite some time now. Its gold lending business has been more de-risked compared to traditional NBFCs.

Data Source: NSE


If you look at the price chart of Muthoot Finance, India’s largest pure gold finance company, the bounce from the lows of March was as sharp as the fall due to the hidden accretion in gold value. Indian households hold 22,000 tonnes of gold worth $1.20 trillion. This value has grown from $900 billion to $1.20 trillion in one year on the back of the 30% accretion in gold prices. That is the big sweet spot for the gold loans business. Here is why!
 
Post COVID-19 – Why gold loans could make the cut?
 
George Alexander Muthoot, chairman of Muthoot Finance, has admitted that post COVID-19 scenario could present a huge opportunity for gold loan companies in India.
  • Small businesses will need working capital to resume their businesses. With banks reluctant to take on fresh risk in their books, gold loan companies could be the natural choice for smaller working capital needs.
  • Due to the lockdown, payments have been delayed to traders, shopkeepers and small businesses. They need access to bridge finance to run the business till cash flows come in. Here again; gold loans could be a clear choice.
  • Both Muthoot and Manappuram expect huge demand for gold loans from retail consumers too. Most families have seen either a reduction in incomes or loss of jobs. Gold loans may be the least risky choice as also the most feasible choice for them to raise funds to keep the household ticking.
  • Finally, there is the big LTV advantage. Gold loan companies offer loans at 75% loan-to-value (LTV). However, the 30% rise in gold prices in last one year would mean the effective LTV would be closer to 52%. That leaves a huge room open for top-up gold loans and could be most sought after in the post-COVID scenario.
 Gold loans may be uniquely positioned to capitalize on post-COVID demand; especially for individuals and small business clients. An expanded branch network and a strong digital footprint may just be the recipe to capture this extra market share.

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