The proposal by the Reserve Bank of India (RBI) to increase the loan to value (LTV) ratio to 75 per cent from the present 60 per cent is likely to help gold loan companies raise their business volume at a reasonable rate, says an Icra report.
It, however, added the pace of growth of these firms is likely to be much lower than the over 120 per cent compounded annual growth rate (CAGR) witnessed over the last three years.
The K U B Rao committee, appointed by RBI on gold loan companies (GLCs) was released on January 2. It has proposed to increase the LTV ratio along with a host of other recommendations for monetisation of gold.
The report also acknowledged the positive role of banks and non-banking financial companies (NBFCs) in monetising gold.
Referring to the report, the agency also said gold loan NBFCs may not increase their market share from the present level as banks enjoy a competitive advantage over them.
“As banks enjoy a competitive advantage over NBFCs, and given the healthy risk-adjusted returns and growth prospects in the gold loan segment, banks could step up the pace of growth of gold loans. Were this to happen, the market share of NBFCs in gold loans may not increase from the current 28 per cent by FY12 end,” the report said.
It noted the pace of growth of gold loan companies might slow down as they rely more on wholesale funding sources.
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“Significant funding constraints (despite possible easing) may slow down the pace of growth of GLCs, as such entities are highly reliant on wholesale funding sources," the report said.
It, however, pointed out that banks with 72 per cent market share could expand the Rs 1.4 lakh crore gold loan market in the short-term with increase of their market share.