The gold loan market in India remains largely untapped. According to a report by investment banking and capital market firm Jefferies organized gold financiers account for just 5-6 per cent of the country's household gold tonnages and 40 per cent of the gold loan business.
Gold Loan Market Untapped
The report suggests a significant portion, around 60-65 per cent of gold loans still happen through unorganized channels.
Agri Gold loans and Non-Banking Financial Companies (NBFCs) each accounts for 14 per cent of the gold loan portfolio, and banking channels give about 7 per cent of gold loans.
This growth has been mainly driven by formal lenders like banks and Non-Banking Financial Companies (NBFCs), which have expanded their reach and offered more competitive interest rates, ranging from 9-26 per cent, compared to the 25-45 per cent charged by unorganized lenders. |
However, over the past decade, the organized gold loan market has seen steady growth, with the total assets under management (AUM) rising by 12 per cent annually to reach approximately Rs 6.2 trillion as of March 2023.
This growth has been mainly driven by formal lenders like banks and Non-Banking Financial Companies (NBFCs), which have expanded their reach and offered more competitive interest rates, ranging from 9-26 per cent, compared to the 25-45 per cent charged by unorganized lenders.
Agricultural Gold Loans
Banks have been traditionally dominated the organized gold loan market, holding over 75 per cent of the market share. Nearly 80 per cent of these are given for agricultural gold loans.
In contrast, NBFCs have focused on retail gold loans against jewellery, with their share reaching about 60 per cent of the Rs 2.4 trillion market by March 2024.
Leading gold NBFCs have seen their gold loans grow at a rate of 12 per cent annually over the last decade. |
The Jeffries report says that while the market structure is favourable, the growth of gold loans has historically been closely tied to gold prices. Leading gold NBFCs have seen their gold loans grow at a rate of 12 per cent annually over the last decade.
However, the growth in customer numbers and the amount of gold pledged has been slower, at just 1-3 per cent annually. This is partly because of the limited geographic reach of gold loan branches and high costs associated with expanding branch networks.
Jeffries suggest that despite these challenges, higher gold prices are expected to support stronger loan growth in the future. Gold prices tend to rise when real interest rates are low, making gold a more attractive investment.
Even though real interest rates have increased recently, gold prices have remained strong, driven by factors like buying by central banks, geopolitical uncertainties, and concerns about the U.S. fiscal deficit. Central banks around the world have been buying gold in record amounts, with net purchases reaching 1,082 tons in 2022 and 1,037 tons in 2023.
This trend has continued into 2024, with central banks adding 290 tons in the first quarter alone. China, for example, added 27 tons during this period. These purchases have helped keep gold prices stable, even as the expectation of interest rate cuts has been delayed.
Banks See Retail Loans Grow By 20%
Additionally, concerns about the U.S. fiscal situation and inflationary pressures have driven recent increases in gold prices. Although some recent U.S. economic data has been mixed, the potential for stagflation--a combination of stagnant growth and high inflation--has supported gold prices.
Looking ahead, many central banks, particularly in emerging and developing economies, plan to increase their gold reserves, which should further support gold prices.
Banks, which typically offer larger loans at lower interest rates, saw their retail gold loans grow by around 20 per cent year-on-year in FY23 |
Competition in the gold loan market has intensified in recent years, with more NBFCs entering the market and banks focusing on retail gold loans, especially after the pandemic.
Banks, which typically offer larger loans at lower interest rates, saw their retail gold loans grow by around 20 per cent year-on-year in FY23, compared to 10-12 per cent growth at gold-focused NBFCs.However, competition from banks has eased somewhat in the past year, as reflected in the withdrawal of lower-yield loan schemes and improved yields at NBFCs.
The market share of NBFCs in retail gold loans has stabilized at around 60 per cent. Meanwhile, public sector banks have slowed their gold loan growth following a government directive to review and tighten gold loan processes.
The gold loan market in India is highly under-penetrated, organised lenders are slowly gaining shares but still with about 60 per cent of gold financing unorganised there is a high scope for organised gold financing companies.
