Better year for gold loans expected as prices stabilise

Gold prices have more or less been broadly in the range of Rs 26,500-27,500 for 10g

With the reduction in the volatility in gold prices, lenders are expecting this year to be better than the last in terms of the gold loan business.

Last year, with the price of the yellow metal fluctuating, lenders had begun to cautiously monitor the gold loan portfolio, taking a calibrated approach to growing it.

However, this year, gold prices have more or less been broadly in the range of Rs 26,500-27,500 for 10g, giving banks the confidence to grow their gold loan books.

Though globally there has been some volatility in prices, it hasn’t had an effect on the domestic market due to the depreciating rupee.

In calendar year 2014, gold prices had fluctuated widely between Rs 27,000-30,000 for 10g, thus making lenders cautious about growing their books.

“We are 100 per cent sure that this year will be better than last year as far as gold loans are concerned.

“We are looking at 25-30 per cent growth this year and we are almost on track for that,” said a banker at HDFC Bank.

Earlier, gold loans were typically available only for a short duration of one year but recently HDFC Bank has extended the tenure to up to three years.

Since gold loans are secured in nature, the rate of interest at which they are offered are cheaper than unsecured products such as personal loans.

For instance, gold loans from banks are typically available at the interest rate of 12.5-14 per cent as compared to personal loans which are at a rate of 15-20 per cent.

It is not just banks but even non-banking financial institutions expect the gold loan business to be better this year.

S Kannan, executive vice-president, Muthoot Fincorp, said it is not just growth but even the recovering from existing borrowers will also improve due to the stability in prices.

This is because when the gold prices go down, the propensity to redeem the loan by the customers also goes down.

Apart from the stable prices, lenders are also aggressively advertising about gold loans and positioning it as a cheaper borrowing option in order to attract consumers. 

“The unorganised market is estimated to be four times larger than the organised market due to which there are opportunities and as a result we have been trying out to reach to that section of consumers.

“Earlier, the focus was more on walk-in customers but now we are trying to reach out via campaigns and advertisements etc,” said  Kapil Krishan, chief financial officer, Manappuram Finance.