Rise in gold prices leads to healthy growth in gold loans

The steady rise in gold prices is leading to healthy growth in gold loan demand. The biggest beneficiary of this trend is expected to be banks and gold loan fin-tech companies which are offering gold loans at relatively lower interest rates.

A recent report by Motilal Oswal noted that this trend will continue and gold prices will sustain the same momentum in the CY (Calendar Year) 2023 due to the expected deterioration in broader macroeconomic indicators both in India as well across the world.

However, despite the rise in gold prices, there will be no significant changes in gold loan rates.

Gold prices in India increased over the last two months. After a steep increase, prices fell for the second day in a row after hitting a record high earlier this week. On MCX, bullion futures fell 0.3 per cent to Rs 561,63 per 10 grams from its all-time high of Rs 56,562 per ten grams.

As per the Motilal report, companies such as Muthoot Finance and Mannapuram Finance have not made any notable changes to their gold loan schemes in January. This would mean the NBFCs too are unlikely to re-introduce any teaser-rate loans to accelerate loan growth.

However, there is fierce competition in the market with gold fin-tech companies such as Rupeek and Indiagold offering lower pricing in the market. The report observed that lenders are unlikely to offer any teaser-rate schemes to accelerate loan growth as they are now prioritising profitability over growth.

Both Muthoot and Mannapuram have not reported any significant increase in borrowing costs until September 2022 aided by the maturity of higher-cost borrowings.

Interestingly, according to the report, while some of that advantage could sustain over the next two quarters, an increase in borrowing costs is expected to become more pronounced in FY 2024.

The report said Rupeek and Indiagold are still the biggest competition to gold loan NBFCs and banks in metro and Tier 1 cities because of the finer pricing offered by these companies. The report stated that Rupeek has started focusing on profitability by charging processing fees plus GST on select schemes offered. Bank partners (such as Federal Bank and Indian Bank) who co-lend with Rupeek do not charge any processing fees and hence the entire processing fee goes to Rupeek.

Meanwhile, gold loan NBFCs such as Muthoot and Mannapuram and Indiagold are still not charging any processing fees and pre-closure charges and part-release fees from the customers. The Motilal report said interest rates charged by banks in co-lending with gold loan fin-tech companies are sustainable, suggesting that the competitive landscape will not turn benign in near future.