As the pandemic recedes, lenders with presence in the gold loan market are reconsidering aggressive growth strategies they employed last year. Non-banking financial companies (NBFCs) have discontinued teaser loans which they had launched to take on the increasing presence of banks in the segment.
During the first year of Covid-19, quite a few large banks had increased their exposure to gold loans, which were seen a safe means of growing the retail book. The Reserve Bank of India’s (RBI) decision to raise the amount banks could lend to 90% of the value of gold ornaments from 75% also helped lenders gain an edge over NBFCs. With competitive intensity rising, NBFCs turned to market strategies that prioritised growth over margins.
That might be changing now. VP Nandakumar, MD and CEO, Manappuram Finance, in a post-results call last month said the intense price competition among NBFCs had begun to affect its margins in gold loans. “Therefore, we took a conscious decision to steadily withdraw from the price war, notwithstanding its short-term impact on growth. However, going forward, we see this as a temporary or passing phase because of unhealthy competition,” he said.
Bank exposure to gold loans has also dipped, according to sectoral data for April released by the RBI. As on April 22, 2022, the value of outstanding bank loans against gold jewellery was down 3% year-on-year (YoY) to Rs 74,281 crore. In April 2021, gold loans by banks had grown 86% YoY. One reason for the slowdown could be closing of the window for higher loan-to-value ratio in April 2021.
Major bank players in the gold loan segment – CSB Bank and Federal Bank – reported slower growth through much of FY22. Shyam Srinivasan, MD & CEO, Federal Bank, said during the first nine months of FY22, the gold loan market slowed and the bank saw lower traction. “It picked up quite meaningfully in Q4 and I see that continuing in FY23,” he said in an investor call.
Analysts say the positive takeaway from all these is the discontinuation of teaser loans, where interest rates are kept low during the initial period, only to be raised later. In a report dated June 7, CLSA said teaser loans launched during November 2021 were discontinued in March-April. “Those loans were at 7-8%. The cheapest loan now available is 10% at two gold lenders and 12% for the third,” the report said, referring to gold loan NBFCs.
While the slower growth in April 2021 could be due to the seasonal phenomenon of customers retrieving their gold for the wedding season, the withdrawal of teaser rates could also be playing a part, CLSA said.
Although NBFCs have increased loan rates, banks have left them unchanged, with the cheapest loans 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 loan footprint. The bank is working towards making all its branches in Maharashtra capable of processing gold loans by the end of FY23.