The demand for gold in India for the Q3 (July to September 2020) was down by almost 30 per cent as compared to the same quarter of the preceding year. The demand in gold was at 86.6 tonnes in Q3 (July to September 2020) when compared to Q3 of 2019. Total demand for jewellery in India for Q3 2020 decreased by 48 per cent at 52.8 tonnes as compared to Q3 of the same period in 2019 (101.6 tonnes).
However, in value terms, the gold investment demand in Q3 2019 was Rs 15,410 crore, up by 107 per cent from Q3 2019 and was at Rs 7,450 crore. Interestingly, the demand for gold in Q3 of every fiscal tends to be relatively low generally due to seasonal factors like monsoons and inauspicious periods like Pitru-Paksh and Adhik Maas. As per the World Gold Council, which is the market development organisation for the gold industry, there was an increase in investment demand for gold bars and coins by almost 51 per cent as gold is considered as a safe haven and there is always an anticipation of price rise.
At the same time, the World Gold Council has observed that during the lockdown months there has been a rapid rise in digital engagement with several tech initiatives by major jewellers to woo buyers. During this period there was also a rise in the volumes of allocated gold being sold by digital platforms through wallets along with a significant activity in Gold ETFs following a prolonged period of quiescence. Also, due to the higher prices the recycling of gold increased by 14 to 41.5 tonnes. Gold imports also resumed in anticipation of the oncoming festival demand as supply chain related restrictions were eased and it grew from 9 tonnes in the previous quarter to 90.5 tonnes (8 per cent y-o-y increase).
The World Gold Council finding further observes that in the oncoming quarter is expected to witness an upswing in gold demand on account of the festival season. It is also expected that this year, a good monsoon notwithstanding, price and COVID-19 shadow will affect the sentiment, though at least a part of the pent-up demand for gold is likely to surface. As weddings and festivities become low-key affairs, savings on other spends is expected to be channelised into investment in gold. However, the demand for gold is expected to be influenced by the impact of the pandemic and fear of a second wave of infections without clear sight of many variables on consumer behaviour, volatile prices or length of the disruptions.
Though the demand for gold has been towards the lower side the unlocking of the Indian economy is expected to give a rise in gold loans especially from individuals meeting urgent personal requirements and from micro enterprises for working capital to restart businesses. As per CRISIL, gold loans would be preferred also because non-banking financial companies (NBFCs) and banks have tightened their underwriting norms for other loans, leading to cautious lending to micro and small enterprises, traders and the self-employed. As per CRISIL higher average gold prices on year mean gold loan assets under management of NBFCs could grow 15-18 percent this fiscal.
“Unlike other asset classes, gold loans have not faced major issues in collection and disbursement, or re-pledge of loans, barring in the stringent lockdown phase in April and May. With many NBFCs facing collection challenges and a likely increase in delinquencies, fresh disbursements, especially to the MSME and unsecured loan segments, have remained low. Consequently, gold loan financiers are expected to benefit. Preliminary estimates indicate that gold loan disbursements, including re-pledge, at NBFCs have more than doubled sequentially in the second quarter of this fiscal.” pointed out Krishnan Sitaraman, Senior Director, CRISIL Ratings.
The Reserve Bank of India (RBI) had recently relaxed the loan to value (LTV) for gold loans given by banks. CRISIL says that while this will benefit banks focused on gold loans, any substantial weaning away of customers of large gold loan NBFCs will hinge on banks replicating the quick turnaround time, seamless disbursal process and flexible foreclosure options with interest rebate that the NBFCs are known for, and their customers are used to.
CRISIL expects gold loan NBFCs to maintain their credit profiles backed by healthy business growth, strong capitalisation metrics and solid asset quality by maintaining LTV at adequate levels besides carrying out timely auctions in case of delinquencies.