Gold loan demand stays strong despite cash disbursement curbs: CRISIL

Gold loan non-banking finance companies (NBFCs) saw healthy growth in June despite the Reserve Bank of India curbing cash disbursements, according to a report by rating agency CRISIL.

According to CRISIL, growth for gold-loan NBFCs has been supported by favourable movement in gold prices. Moreover, given their robust risk management practices, these NBFCs are well placed to withstand adverse gold price fluctuations, as seen in the past few weeks.

Ajit Velonie, senior director, CRISIL Ratings, said, “Early evidence of growth momentum is seen in the disbursements for June 2024, which were approximately 12 per cent higher than the average monthly disbursements in the preceding quarter. Excluding one large player, the growth was even higher at around 23 per cent.”

Further, the robust risk management practices of these NBFCs aided them in withstanding adverse gold price fluctuations, despite the Reserve Bank of India’s (RBI) directive on cash disbursements of gold loans, CRISIL said.

In May 2024, the RBI issued a directive to adhere to the provisions of the Income Tax Act, whereby loans cannot be disbursed in cash in excess of Rs 20,000. Anything over this amount will have to be disbursed through banking channels such as the National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS), or the Unified Payments Interface (UPI).

Following these directives, NBFCs smoothly transitioned to digital channels with only a slight increase in turnaround time, which has helped them maintain their edge over banks, the rating agency said.

However, any sharp fall in gold prices and their sustenance at lower levels for a longer duration could have a potential impact. These NBFCs will have to monitor their loan-to-value (LTV) ratios and conduct auctions in a timely manner to mitigate any risks.

“To be sure, NBFCs have been grappling with gold prices, which have declined after the reduction in customs duty announced in the full Union Budget for this financial year,” said Malvika Bhotika, director, CRISIL Ratings.

Bhotika pointed out two reasons why the declining gold prices have not materially affected gold-loan NBFCs.

“One, CRISIL Ratings estimates the portfolio loan-to-value (LTV) range for these NBFCs was low at 60-65 per cent (on a mark-to-market basis) as on June 30, 2024, which provides adequate cushion to manage unfavourable movement in gold prices. Two, these NBFCs have typically focused on periodic interest collection, keeping LTV under check,” she added.