MUMBAI: Gold loan focused non-banking financial companies are expected to see their already healthy profitability rising in the medium-term with average return on managed assets estimated in the range of 4.25-4.5% through this and the next fiscals while loan books may grow by 40%.
Assets under management of gold-loan companies are expected to grow at an annualised rate of 40% between this fiscal and the next, significantly outpacing branch additions. In the first nine months of this fiscal, branch productivity rose 30% for these entities. For large gold-loan NBFCs, average AUM per branch shot up to Rs 21 crore, while for mid-sized counterparts it rose to Rs 11.5 crore, Crisil Ratings said in a report.
The rise in profitability will be supported by strong demand, improving operating leverage and low credit losses even as competition from banks and other NBFCs increases, Crisil said in a report Monday.
According to Aparna Kirubakaran, a director at Crisil Ratings, an expansion in the lender base and intensifying competition have moderated asset yields in recent quarters, though they remain higher relative to many other secured businesses.
While the impact on net interest margins has been offset by softening of borrowing costs this fiscal, overall profitability has found support from better operating leverage on the back of a surge in demand, she said.
A large part of the growth this fiscal is attributable to a sharp increase in the gold prices over the past one year. Further, a shift in demand away from unsecured credit to gold loans and recent regulatory developments affording higher loan-to-value norms and flexibility on branch network expansion will further support growth prospects.
Larger gold-loan companies are better positioned to capitalise on operating leverage, aided by strong franchise strength, higher business volume per branch and continued investments in technology and centralised operations. Their scale enables more efficient absorption of fixed costs, the report said.
On the other hand, mid-sized gold-loan companies, many of which have been increasing branches to capture incremental demand, may continue to have relatively elevated operating expenses in the near term.
According to Prashant Mane, an associate director with Crisil Ratings, benign credit costs are another driver of profitability for gold-loan companies. Losses have been historically low because of the collateralised nature of these loans, high liquidity of the underlying precious metal and well-established auction processes.
Credit costs have stayed below 1% over the past five fiscals and are expected to remain low. While elevated gold prices over the past year have further strengthened collateral buffers, structural safeguards such as prudent loan-to-value norms and timely auctions should support recoveries in case of correction in gold prices.