Larger gold loan players less impacted by Reserve Bank of India advisory

While banks are dominant in jewellery-backed agriculture loans, NBFCs lead in retail gold loans and are expected to expand at 17-19 per cent in FY25

The Reserve Bank of India (RBI) has issued an advisory for entities giving gold loans (GL) where it identified irregular practices and gave three months for lenders to correct these and avoid supervisory action.

The review revealed irregularities like improper use of third parties for loan sourcing, gold valuation without the customer’s presence, poor due diligence, lack of transparency in auctions, weak monitoring of loan-to-value (LTV) ratios, and incorrect application of risk weights. Threat of RBI action could impact growth in GL and impose additional costs on lenders. But larger entities will be less affected. 

Prior to the RBI circular, ICRA forecast gold loans (GL) by banks and non-banking financial companies (NBFCs) would exceed Rs 10 trillion in financial year 2025 (FY25) and reach Rs 15 trillion by March 2027.

NBFCs lead in retail gold loans and are expected to expand at 17-19 per cent in FY25. But yields are expected to be lower by 200-300 basis points than the peak levels of 4-5 years back.

ICRA expects NBFC GLs to expand at 17-19 per cent in FY25 and projects it to grow at an annual rate of 14-15 per cent during FY26-FY27.

Growth in the GL book of NBFCs is largely driven by the gold prices. The NBFC GL book is quite concentrated, with the top four players accounting for 83 per cent share in March 2024, but this declined from 90 per cent two years ago. Credit costs have remained well below 0.5 per cent in the last five years. Access to collateral reduces credit risk and lenders may undertake timely auctions.

The directions restricting cash disbursements (on loans of more than Rs 20,000) did not impact business. International prices are at record highs due to growth and geopolitical concerns and a falling US dollar. Gold has historically rallied by 10 per cent in the six months after the first Fed cut and this trend will drive the GL segment.

NBFCs like Muthoot, Manappuram, IIFL Finance had gold loan yields of 18.3 per cent, 21.8 per cent and 19.6 per cent respectively in Q1FY25 (vs. 18.1 per cent, 21.4 per cent, 17.5 per cent in Q1FY24). Most players, including banks, have strong commentary on gold loans.

Despite the RBI advisory, GL NBFCs may be a proxy play for rising gold prices. Strong gold prices are positive for Muthoot and Manappuram’s AUM, which enjoy a strong correlation with gold price.

GL demand is also being pushed up by pressure on unsecured lending. Management guidance for GL growth is 15 per cent plus for Muthoot and Manappuram which registered 23 per cent and 15 per cent YoY and 11 per cent and 10 per cent QoQ growth in Q1FY25 respectively.

In Q1FY25, growth in tonnage for Muthoot was 6.6 per cent year-on year (YoY) (total Rs 194 tonnes) and 1 per cent YoY (total Rs 60 tonnes) for Manappuram. The LTV has reduced with gold price increase from 68 per cent and 64 per cent in Q1FY24 to 63 per cent and 60 per cent in Q1FY25 for Muthoot and Manappuram respectively. Growth in active customers for Muthoot was 9.2 per cent YoY to 5.9 million and for Manappuram was 8.3 per cent YoY to 2.6 million in Q1FY25.

PAT growth for subsidiary businesses has been good for both groups. The non-gold AUM growth was 31 per cent YoY (Manappuram) and 60 per cent YoY (Muthoot) in FY24 and 29 per cent (Manappuram) and 50 per cent (Muthoot) in Q1FY25.

Muthoot had 15 per cent of AUM and 9 per cent of net profit coming from non-gold business in FY24. Manappuram had 49 per cent of AUM and 25 per cent of net profit coming from non-gold business in FY24. Both companies have seen share prices rising through CY24 and there could be significant upside given the positive drivers.