Gold loans firms' FY22 book to grow at 18-20% on tiny biz demand: Crisil

Working capital needs drive uptick in demand; gold loans taken by individuals support uptrend

After witnessing contraction in the first quarter, the gold loan companies may see 18-20 per cent rise in Assets Under Management (AUM) in Fy22 on uptick in demand from micro-businesses and individuals.

Rating agency Crisil said the business of the finance companies which offer loan against gold was hit in the first quarter of FY22 when the pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.

Now the demand for gold loans from micro enterprises to fund working capital and individuals has risen with the pick-up in economic activity. The onset of the festive season coincides with the easing of lockdown curbs by several states.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings: “Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter. Gold loans will continue to be a sought-after asset class, while lenders would remain cautious about growth in many other retail asset classes.”

From a credit perspective, gold loans are a highly secured and liquid asset class that generates superior returns with minimal credit losses. Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic.

Historically, gold-loan NBFCs have seen negligible losses due to robust risk management practices like periodic interest collection (which keeps the loan-to-value, or LTV, under check) and timely auctions of gold.

Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold impacts both the portfolio and disbursement LTV1 as it influences the cushion available with lenders.