Gold loan financiers are poised to capitalise on the current surge in gold prices and a slowdown in unsecured lending, triggered by an increase in risk weights by the central bank. Financial institutions, in a bid to trim their exposure to unsecured retail loans, are witnessing a shift as borrowers increasingly opt for secured alternatives like gold loans to fulfil their funding requirements.
The escalating cost of obtaining personal loans and consumer durable loans is anticipated to steer individuals towards asset-backed loans.
The Reserve Bank of India has raised risk weights on unsecured lending for both banks and NBFCs, making such loans dearer.
The significant reduction in unsecured consumer loans is projected to fuel heightened demand for gold loans, given their intrinsic security. The ongoing uptrend in gold prices further enhances the appeal of gold loans.
Gold prices rise
Gold prices have recorded a substantial 25% increase compared to an average price of Rs 50,000 in the first quarter of the year. This upward trajectory, coupled with a growing demand for loans, has substantially boosted the gold loan segment. The industry has experienced a surge in individuals choosing gold loans, leveraging their existing gold assets to address their financial needs.
Contributing factors to this surge include geopolitical events, low interest rates in the US, and a favorable economic environment. The gold loan industry is expected to receive additional support, with analysts projecting 8-10% year-on-year growth in gold loans. A return to 10-12% gold loan growth is anticipated in the coming quarters as economic activity rebounds.
While challenges may emerge due to higher capital requirements for gold financiers, potentially impacting their growth, the increased distribution of gold loans through digital channels is contributing to overall industry growth. This, coupled with the prevailing credit crunch, is set to ensure robust demand for gold loans. The extended period of high credit costs, expected to persist until mid-2024, is seen as favourable for gold loan financiers to expand their business.
