Recent Trends in Gold Loan: Market Insights

Here are the 7 trends in gold loan you may have missed:

1. Post the first wave of the pandemic, with the ease of lockdown restrictions and rebound in economic activity, demand for gold loans has gone up, especially from micro-enterprises and individuals, to fund working capital and personal requirements.

The pandemic has adversely impacted businesses all over the world. These businesses are trying to get back on track, for which gold loans are the easiest option available owing to their hassle-free nature. Also, gold loans do not require any credit check.

Another reason for the increase in the gold loan book size is the rising number of start-ups and self-employed ventures. Since a gold loan requires less paperwork, people prefer to raise funds for new businesses.

2. Gold loans do not have an NPA and have an interest rate of 7.5%.

*Since lenders hold physical gold with them, there is no chance of the gold turning into NPA**. In the case of non-repayment, the gold can be auctioned to cover the losses. Moreover, lenders can provide more support to their borrowers due to less paperwork and other requirements. Owing to the ease of disbursal and a low-interest rate, gold loan demand has been seeing a rising curve and is expected to shoot up further in the days to come.

3. Gold prices significantly affect gold loans. In the first quarter of 2021, gold prices in India were down almost 12%.*

This triggered a change in the LTV ** of the existing loans. To match it, lenders had to renew the existing loans, thus causing a lot of rework and pressure. It resulted in a decline in gold loan disbursals. Let's consider this example: For gold worth Rs. 1 lac, banks would have issued a loan of up 90%, i.e., Rs. 90,000/-. When the gold prices dropped 12%, the same gold's monetary value came down to Rs. 88,000/- against which the bank has already issued a loan of Rs. 90,000/-. Therefore, banks had to renew the loans to align with these changes.

4. LTV is another variable that directly impacts gold loans. Till the first quarter of 2021, the RBI had allowed an LTV of 90%.

In simple terms, for gold of value Rs 1 lac, Rs. 90,000 can be granted as a loan against it. However, the RBI changed its norms in April 2021 and decided on an LTV of 75%. This put pressure on banks to rework their existing loans and match the LTV.

5. Apart from its hassle-free nature, the skyrocketing price of gold has made gold loans more popular in recent times. With higher gold prices, borrowers can now get more loans against their gold, and are thus switching to gold loans.

6. The gold loan market is expected to rise further till the end of 2022. Since 2019, gold loan companies, banks or NBFCs, have expanded aggressively to penetrate deeper into every market segment. The introduction of online platforms and digital models in the gold loan segment has opened up many untapped streams.

7. Of late, NBFCs have grown as a significant contributor to the gold loan segment. They have become a primary choice for gold loans among borrowers owing to lesser regulations and faster loan disbursals. Historically, these firms have also seen negligible losses related to gold loans. This is owing to their robust risk management practises like periodic interest collection and timely auction of gold.

Owing to their rising popularity as a gold loan lender, NBFCs are further estimated to record significant AUM (Assets under management) growth in the days to come.