As the pandemic recedes, lenders in the gold loan market are reconsidering the aggressive growth strategies they employed last year. Non-banking financial companies (NBFCs) have moved away from the eye-catching loans they had launched to cope with the growing presence of banks in the segment.
During the first year of Covid-19, a number of major banks increased their exposure to gold lending, which was seen as a safe way to grow the retail portfolio. The Reserve Bank of India’s (RBI) decision to increase the amount banks could lend to 90% of the value of gold ornaments from 75% also helped lenders gain an edge over NBFCs. With increasing competitive intensity, NBFCs turned to go-to-market strategies that prioritized growth over margins.
That could change now. VP Nandakumar, MD and CEO of Manappuram Finance, on a post-earnings call last month, said intense price competition among NBFCs had started to affect its gold lending margins. “Therefore, we have made a conscious decision to gradually withdraw from the price war, despite its short-term impact on growth. However, going forward, we see this as a temporary or passing phase due to unhealthy competition,” he said.
Banks’ exposure to gold lending also declined, according to April sector data released by the RBI. As of April 22, 2022, the value of outstanding bank loans against gold jewelery was down 3% year-on-year (YoY) at Rs 74,281 crore. By April 2021, gold lending by banks was up 86% year-on-year. One of the reasons for the slowdown could be the closing of the loan-to-value ratio increase window in April 2021.
The major banking players in the gold lending segment – CSB Bank and Federal Bank – saw slower growth for much of FY22. Shyam Srinivasan, MD and CEO of Federal Bank, said that during of the first nine months of FY22, the gold loan market slowed and the bank saw declining traction. “It picked up quite significantly in the fourth quarter and I see that continuing into FY23,” he said on an investor call.
Analysts say the positive conclusion to all of this is the discontinuation of hook loans, where interest rates are kept low in the initial period, only to be increased later. In a report dated June 7, CLSA said teaser loans launched in November 2021 were halted in March-April. “These loans were at 7-8%. The cheapest loan currently available is 10% at two gold lenders and 12% for the third,” the report says, referring to gold lending NBFCs.
While the slowdown in growth in April 2021 could be due to the seasonal phenomenon of customers picking up their gold for the wedding season, the withdrawal of teaser rates could also play a role, CLSA said.
Although NBFCs raised lending rates, banks left them unchanged, with the cheapest lending from banks still starting at around 7%, CLSA said. The competition may be here to stay, with the country’s largest private lender, HDFC Bank, expanding its gold lending footprint. The bank is striving to make all its branches in Maharashtra capable of processing gold loans by the end of FY23.