Gold loans became the fastest growing major loan segment for banks in a year when the ongoing pain of the pandemic prompted lenders to seek low-risk growth. Outstanding loans against gold jewelery stood at Rs 62,926 crore on August 27, up 66% year-on-year (y-o-y), according to sectoral data put together by the Reserve Bank of India (RBI).
Lending for gold is seen as the safest form of lending to individuals, on a par with housing loans. In the past few years, public sector banks have also made a strong push in the sector to securely grow retail ledgers.
In August 2020, the Reserve Bank of India raised the loan-to-value ratio for loans to pledge gold and jewelry for non-agricultural purposes to 90% from 75%. The rule was in effect until March 31, 2021.
Analysts at Motilal Oswal Financial Services noted that despite regulatory arbitrage for LTV rally ending March 2021, banks continued to aggressively cash out gold loans.
They noted, “To this end, players such as Manappuram Finance proceeded to offer competitive interest rates to high-ticket volume gold loan customers and were able to take back these customers from banks and some other NBFC Gold Loan companies.”
In May, CS Setty, MD, State Bank of India noted that the bank has ramped up its gold loan facility across the country and this has helped grow the portfolio to Rs 20,000 crore on March 31, 2021.
“After setting up the facilities, we see that there are opportunities of another Rs 10,000 crore in the current financial year. Also, you must remember that gold loan is a very volatile game. This means that if you want steady growth, you have to provide more loans,” Stei said. The lender also had plans to increase agricultural gold loans by around Rs 4,000-5,000 crore in FY22.
However, the second wave of the epidemic in April and May severely damaged the collections of gold loans through lending institutions. Borrowers were often unable to travel to put in extra spreads to cover the rise in gold prices which resulted in many accounts not performing.