The robust growth trajectory witnessed in the gold loan portfolios of banks is now showing signs of moderation, attributed to increasing competition from gold loan companies and fintech firms, alongside higher gold prices impacting individuals’ purchasing power.
According to data from the Reserve Bank of India (RBI), the year-on-year growth in loans against gold jewellery offered by banks has dipped to 15% in February from its peak of 26% in June 2023.
The surge in gold prices over the past year has led individuals to purchase less gold, consequently reducing the quantity available for pledging. This trend has intensified competition among banks, gold loan companies, and fintechs, particularly in semi-urban and rural areas.
Why the drop?
The rally in gold prices has been largely driven by global factors, including expectations of a US Federal Reserve rate cut and increased purchases by global central banks.
Bankers anticipate continued growth in gold loans as higher gold prices enable borrowers to obtain larger loan amounts against the same quality and quantity of gold pledged. This expectation is based on the premise that the increase in eligibility amounts due to rising gold prices will attract more borrowers towards gold-backed financing.
The price of gold, which stood at Rs 58,000 per 10 grams at the end of March 2023, has soared to an all-time high, hovering around Rs 71,000 per 10 grams, marking a significant increase of nearly 22%. |
The intensifying competition in the gold loan market has been further fueled by fintech firms redirecting their focus towards secured loans, such as gold loans, following the RBI’s decision to raise risk weights on unsecured loans. Concerns over a surge in personal loans prompted the RBI to impose a 25-basis point increase in risk weight requirements for banks and non-banking financial companies (NBFCs) in November last year.As a result, several fintech firms have diversified their product portfolios to include gold loans, aiming to offset the impact of higher capital costs and capitalize on the growing demand for secured lending options.