The end of the gold rush

The RBI has restricted the LTV value of gold loans to 60% in bid to reign in the dependence of the industry on gold price fluctuations. This has far reaching implications on the growth and profitability of gold loan focused NBFCs. For some of the less sophisticated and smaller ones, this could be the end of the road.


In the last three-five years, the primarily South India based, Gold loan NBFCs have seen exponential growth rates with the opening of thousands of gold loan branches especially in the northern markets where cultural acceptability of the gold loan product is gradually increasing.These NBFCs have grown on the back of a couple of critical differentiators in the past

1.Quick service - the speed of dispensing the gold loan was significantly faster than any of the banks
2. Higher LTV - LTV (loan to value) is the ratio between the amount of gold given to the value of gold placed as collateral.


The second was a significant differentiator, since it catered to the credit hungry Next Billion and rural consumer who finds this a convenient and hassle free mode of getting credit. In return though, the NBFCs charged interest rates way above banks. These NBFCs are able to take on such risks largely due to one reason  - the price of gold has steadily risen over the last decade:

Gold Prices over the last 10 years - Courtesy Kitco.com

Banks, in turn, were happy to purchase some of these loans from NBFCs to meet their priority sector targets - a practise which the RBI has now restricted.

It remains to be seen if these NBFcs can continue to command a higher interest on the basis of a superior network density and, fast and efficient service. Currently, gold loan interest rates are some of the lowest in banks on account of this being a very low NPA portfolio. The cost of funding of a typical NBFC is at best 1% lower than the lowest interest rates offered at PSU banks (which are further lower due to interest subventions provided for Agri loans by the government)
Given the efforts made by banks to improve service levels, it stands to reason that the new regulation has threatened the viability of Gold focused NBFCs. These firms have very little time to find new ways to continue to attract customers (and more importantly retain some of their current ones when they come in for renewals/roll overs). They will need to very quickly find new products to sustain their large branch networks and re-skill staff to sell these products. On the flip side, the role of the local jeweller as a pawn broker/lender will become more prominent.