MUMBAI: The disbursal of loans against gold in the first seven months of the financial year has grown by an astounding 50%. Many analysts see this as a sign of deepening financial distress of the households.
However, there are also other factors as well driving the growth in this segment. The regulatory pushback against unsecured personal loans being one of the primary factors. Every other segment of personal loans grew in mid-single digit during this period at a low 3.3%.
Ease of getting a loan against gold jewellery, the price of which had sniffed at Rs 8,000/gram late October is another factor driving this segment. Also, being a fully secured loan product, unlike unsecured personal loans, banks charge only under-10% interest, while gold loan NBFCs charge much higher, 1.2% a month for three months. If not unpledged in the third month, the interest rate spikes to 2%. In the former scenario, a borrower pays 1.4% on an annualised basis and 24% in the case of the second event.
According to the latest Reserve Bank data on sectoral deployment of credit, banks’ loans against gold jewellery have grown by a whopping 50.4% in the first seven months of this fiscal to Rs 1,54,282 crore as of October 18, 2024, up a full 56% on-year and from Rs 1,02,562 crore end-March 2024. In the same period in October 2023, the growth was only 13%.
And this stupendous growth for banks has come mostly at the cost of standalone players like the three Muthoot group entities, Manappuram Finance, IIFL Finance and a host of other non-bank lenders.
While standalone players began to face growth headwinds after the November 2023 RBI circular asking banks to set aside 25 percentage points (125% in total) more money as risk weights for their loans to NBFCs played a big role in their lower growth in the assets side. As a result, as of October 18, the bank credit to NBFCs have shrunk by 0.7% to Rs 1.5 lakh crore during the first seven months of the year.
While banks control 82% of the market, with NBFCs having only 18% of the total gold loan pie, the latter control as much as 62% of the retail gold loan market, with banks controlling the rest, according to a recent Icra Ratings report.
Bankers attribute this massive spike in gold loans to several factors, including a shift from NBFCs and a preference for secured loans over unsecured ones.
They also attribute the rise in their gold books to the increase in gold prices, which provide borrowers an opportunity to repay old loans and secure higher new loans.
According to an Icra analysis, the organised gold market is expected to cross R10-lakh crore-mark this fiscal from Rs 9.2 lakh crore in FY24 and will grow 50% more to scale the Rs 15-lakh crore- mark by FY27.
This growth will continue to be driven by public sector banks, mostly by their agriculture loans that are backed by gold ornaments. As much as 71% of their gold loan book is agri loans, which come at a subsidised rate along with a Rs 3 lakh cap on single borrower accounts.
Also, this higher growth comes against the RBI last month directing banks and non-banks into gold loans to review their loan policies and procedures, instructing them to rectify any deficiencies within three months.
In the personal loan segment, the year-to-date growth in home loans was a low 5.6% at Rs 28.7 lakh crore as of October 18. The on-year home loan growth was 12.1%, compared to 36.6% in October 2023.
The next highest growth rate was in credit card outstanding, which rose by 9.2% in seven months to Rs 2.81 lakh crore. However, growth in other personal loans, including unsecured loans, was sluggish at 3.3%. As against this, overall bank credit grew 4.9% to R172.4 lakh crore, with credit to industry rising 3.3% during the period.
According to Icra, the gold books of non-banks stood at Rs 1.7 lakh crore in June 2024 driven by rising gold prices leading to ornament tonnage growing muted and are likely to grow this fiscal only at 17-19%. The average loan-to-value (LTV) has generally remained at 64-65%, despite the gold prices gaining over 30% so far this year.