The organised non-agricultural gold finance industry has grown over the past 12 years from a small base of Rs 200 crores in 2009 to Rs 20,0000 crores currently. Interestingly, only 35 per cent of this industry is formal in India and around 40 per cent is with the NBFCs. A report by Motilal Oswal states that gold loan financiers have created a strong proposition versus banks with quicker turnaround time, niche customer base, easy accessibility of a large branch network focused only on gold loans and flexible repayment schedules. Despite the higher interest rate charged, gold financiers managed to gain market share over the last five years in the organized segment due to these advantages. The market has also received a spurt because customers whose cash flows were disrupted during the pandemic are looking to leverage their gold holdings. With more than 80 per cent of the business coming from repeat customers there is significant headroom for growth.
Interestingly, the gold loan market in India is dominated by specialized gold financiers such as Muthoot Finance, Manappuram Finance and Muthoot Fincorp. The report observes that the demand for gold loans to be healthy in the current environment and over the past five years, specialized gold financiers delivered 6-7 percent CAGR in gold tonnage with largely similar CAGR in customer addition. Pricing also stood at 6-7 per cent CAGR over the same time period, resulting in 13 per cent Assets under management (AUM) CAGR over FY15-20.
Interestingly in the current scenario, gold financiers are set to benefit as in the current pandemic situation, their customers would look to raise cash by leveraging their gold holdings, and an increase in gold prices would give a modest impetus to growth. Other drivers for the gold loan market are the inability of customers to get personal loans due to lack of formal documentation, untapped opportunities, especially in the non-South regions and higher share of the rural business, which is doing well. Besides that many of these formal gold financers have flexi-lending terms.
The Motilal report points out that the current hit to the sector due to regulatory arbitrage is expected to be a temporary phenomenon. Recently, the RBI had increased the cap on Loan to Value ratio (LTV) on gold loans for banks from 75 per cent to 90 per cent for loans disbursed until March 31, 2021, post which, it would revert to 75 percent. However, the cap remains at 75 per cent for NBFCs.
“I feel that this would result in only a modest hit as several customers were taking loans at 60-65 per cent LTV despite the 75 per cent LTV cap. Besides this, the banks may not be willing to lend up to 90 per cent LTV from a risk-management perspective and also NBFCs’ branch network is deeper and their turnaround time is much quicker than that of banks,” remarked Alpesh Mehta, Research Analyst at Motilal Oswal.
According to the World Gold Council (WGC), India and China account for nearly half of the global gold demand. In 2019, India accounted for 16 per cent of the global gold demand. Over the past two decades, gold demand has been steady, mostly ranging between 700-900 tons per year. While gold demand has been healthy, gold finance penetration in India has remained low at only 3.5 percent of gold owned. At the same time while gold prices may fluctuate in the medium term, they have been on a steady uptrend in the long term. Over the past 10 to 15 years, gold prices have delivered around 10 to 15 percent CAGR. India is a large gold consumer, but monetization levels are low. In India roughly two thirds of gold holdings are primarily concentrated in the rural pockets of the country. According to a KPMG analysis report, the total gold loans outstanding in the organized sector was less than 5 per cent of the total household gold holdings in India, indicating significantly low penetration.
An interesting trend that was observed in a recent report by CRISIL is that gold jewellery retailers may slash their store expansions on lower cash accrual and higher inventory this fiscal. Slack demand leading to lower cash accrual, elevated inventory levels and curtailed bank finance will lead to moderately negative credit outlook for gold jewellery retailers this fiscal and hard brake store expansion. The CRISIL report observes that the number of new store additions is expected to reduce to almost a third of the average between fiscals 2017 and 2020. Consequently, capital investments will be 70 per cent lower at Rs 650-700 crore this fiscal compared with the average of the past four fiscals.
The report points out that sales volume would plunge because of curtailed discretionary spending following the COVID-19 pandemic, stores remaining shut for most of the first quarter, and intermittent lockdowns in some states in the second quarter. The CRISIL report further states that the overall revenue of gold jewellery retailers would drop an average of 20 to 25 per cent this fiscal. But the operating profitability of these retailers will see only a limited decline of 100-150 basis points to 4.2 to 4.7 percent for reasons such as cost optimisation measures, including renegotiating rentals, curtailing employee costs and reducing promotional expenses; and also a surge in gold prices that may afford room to run tactical promotions such as lower jewellery making charges to prop up revenues without significantly impacting margins.