Various financial entities, including banks, non-banking financial companies (NBFCs), dedicated gold loan firms, and fintech companies, are eyeing the gold loan market opportunity.
Data from the Reserve Bank of India (RBI) revealed a 15% growth in the gold loan market to Rs 1 lakh crore in FY24.
There’s a possibility of microfinance institutions (MFIs) entering the gold loan business. The new regulatory framework for MFIs allows them to allocate up to 25% of their total assets for non-qualified assets, potentially opening up opportunities for them in the gold loan market.
Despite recent regulatory scrutiny, NBFCs are expected to continue playing a significant role due to their agility compared to banks.
The ratio of incremental gold loans to imports, a key metric for assessing the gold loan market, indicates that NBFCs have more room for growth compared to banks. This suggests that the gold loan business still has significant growth potential, particularly for NBFCs.
Regulatory action
The surge in gold loan portfolios of regulated entities has caught the attention of financial authorities. Prompted by concerns over the rapid expansion of this sector, the finance ministry instructed state-run banks to review their gold loan portfolios covering the period between January 1, 2022, and January 31, 2024. This growth has raised questions about its underlying drivers. While the increase in gold prices has certainly contributed to the stability of gold loan books, experts suggest that it’s not the sole factor. Many customers, unable to secure finance from formal sources, might be overleveraging. The penetration of formal players in this market is estimated to be only 35%, leaving a substantial portion of borrowers outside the formal finance realm.
The impact
However, recent regulatory measures by the RBI, including increased compliance costs and tighter credit standards, may impact operational costs for gold loan providers. Despite these challenges, some experts argue that the recent regulatory changes might actually incentivize the gold loan market, especially for urban cooperative banks (UCBs) seeking to meet their priority sector lending (PSL) targets.
