Banks, NBFCs expect a better year for gold loans as prices stabilise

With the reduction in the volatility in gold prices, lenders are expecting this year to be better than last in terms of gold loan business. Last year, with the price of the yellow metal fluctuating, lenders had begun to cautiously monitor the gold loan portfolio and started taking a calibrated approach to growing it.

However, this year the gold prices have more or less been broadly in the range of Rs 26,500-27,500/ 10gm giving banks the confidence to grow their gold loan books. Though globally we have seen some volatility in prices but it hasn’t had an effect in the domestic market due to the depreciating rupee. In the calendar year, 2014 gold prices had fluctuated widely between Rs 27,000-30,000/10gm thus making lenders cautious about growing their books.

“We are 100% sure that this year will become better than last year as far as gold loans are concerned. We are looking at 25-30% growth this year and we are almost on track for that,” said a banker at HDFC Bank. Earlier gold loans were typically available only for a short duration of one year but recently HDFC Bank has extended the tenure to up to three years.

Since gold loans are secured in nature, the rate of interest at which they are offered are cheaper than unsecured products such as personal loan. For instance, gold loans from banks are typically available in the interest rate of 12.5-14% as compared to personal loan that is given at an interest rate of 15-20%.

It is not just banks but even Non Banking Financial Institutions (NBFCs) expect the gold loan business to be better this year.

S Kannan, Executive Vice President, Muthoot Fincorp explains that it is not just growth but even the recovery from existing borrowers will also improve due to the stability in prices. "This is because when the gold prices goes down, the propensity to redeem the loan by the customers also goes down," he said.

Apart from the stable prices, lenders are also aggressively advertising about gold loans and positioning it as a cheaper borrowing option in order to attract consumers.  

"The unorganised market is estimated to be four times larger than the organised market due to which there are opportunities and as a result we have been trying out to reach to that section of the consumers. Earlier the focus was more on walk-in customers  but now we are trying to reach out via campaigns and advertisements etc,” said  Kapil Krishan, Chief Financial Officer, Manappuram Finance.