Gold loans glitter on personal loan crackdown, soaring prices

Rising gold prices on the back of escalating global conflict and uncertainty have also aided demand for gold loans, as customers reassess the value of their collateral and seek more credit against it. Loans against gold jewellery grew at a staggering 51% in September, as against 15% in March, latest central bank data showed. On the other hand, personal loans grew at 11.4% in September, the slowest in almost four years, nearly a year after RBI raised risk weights on unsecured loans or those not backed by collateral.

To be sure, at ₹1.5 trillion, the outstanding base of gold loans is a fraction of personal loans which stood at ₹14.3 trillion as on 30 September.

“When other channels of funding become tight for borrowers—as in the case with unsecured loans right now — technically, there will be a tilt towards gold loans," said Jinay Gala, director, India Ratings and Research Pvt. Ltd. “Moreover, gold prices have also been going up and borrowers take an additional loan when such events happen. In such cases, borrowers want to use the full extent of the loan-to-value ratio owing to the increase in gold prices."

Expressed as a percentage of the value of the asset, regulatory loan-to-value ceilings determine how much credit a borrower would get against a certain collateral. In case of gold loans, this is fixed at 75%, meaning one cannot get more than three-fourth of the value of pledged gold as a loan. However, banks typically have internal LTV ceilings that are lower than what is set by the regulator.

“The slowdown in unsecured personal loan lending may increase the appeal of alternative lending products, such as gold loans," said Geeta Chugh, managing director and sector lead, financial services ratings, S&P Global, adding that it could also be attributed to the substantial rise in gold prices over recent years.

Spot gold prices rose from ₹6,291.85 per gramme on 13 May to ₹7,300.57 on 8 November, an increase of 16%, as per data from the World Gold Council. In fact, from a year ago, prices are up 41%. A 29 October report by Goldman Sachs predicted that prices of the precious metal are expected to rise to $3,000 per troy ounce by end-2025.

Gold prices have touched multiple all-time highs in 2024 so far, owing to concerns of potential global sanctions against various countries, and the subsequent rise in gold purchases by emerging market central banks following the freezing of Russian central bank assets in 2022.

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In September, RBI flagged deficiencies in gold lending practices in using third-party agencies, besides inadequate due diligence and monitoring of end use of funds. Mint reported on 2 October that this caution was likely on account of the brisk growth in the segment.

Chugh expects RBI emphasis on compliance, know-your-customer (KYC), and diligent follow-up of processes will likely strengthen the compliance culture in India, and potentially curb excessive lending practices. “We believe this will drive banks and finance companies to better focus on policies and processes, ultimately enhancing the operational resilience of the system," she said.

Large lenders are also bullish on lending against gold jewellery. At India’s largest lender State Bank of India, personal gold loans grew 28.3% year-on-year (y-o-y) to ₹38,826 crore on 30 September.

“The RBI circular brought a lot more clarity in terms of what actions are to be taken, what are the risk management practices which need to be followed," said C.S. Setty, chairman, State Bank of India. “We did a quick-gap analysis of RBI guidelines and our internal practices and were happy to see that we are almost fully compliant with the guidelines proposed."

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According to Setty, gold loan as a category has potential and the bank has been pushing it through its branches. “A lot of branches in the non-conventional gold loan areas have also been showing good growth. Gold loan provides immediate liquidity to people who want it and if managed well, it is a good product," Setty said on Friday, after announcing the bank’s Q2 FY25 earnings.

However, some believe that it is only a matter of time before such growth ebbs. Gala of India Ratings said that the industry is witnessing a momentary pick-up in gold loans as a result of higher gold loan prices.

The pick-up, Gala said, could also perhaps be because of some amount of shift of demand to the banking sector after an NBFC was barred from this product for a few months. In March, RBI barred IIFL Finance from disbursing fresh gold loans citing “certain material supervisory concerns" in the gold loan portfolio. The ban was lifted in September.

A senior executive at a non-bank financier said that demand for gold loans has been strong and lenders have been banking on it. "But the RBI crackdown could mean that growth could be slower going forward as lenders recalibrate their LTVs and lending practices," the executive said on condition of anonymity, adding gold loan growth in Q2 is likely to have been higher for PSU banks compared with private banks and NBFCs.

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