Banks’ loan against gold jewellery portfolio saw a robust 16.2 per cent year-on-year increase as at January 27, 2023, against a decline of 0.4 per cent as at January 28, 2022, on the back of loan offerings at competitive interest rates vis-a-vis non-banking finance companies.

In absolute term, banks’ loan portfolio increased by ₹11,968 crore in the March-end 2022 to January 27, 2023 period against a decline of ₹270 crore in the year ago period, as per RBI data. 

Low cost of funds is proving advantageous for banks as they are able to price their loan against gold jewellery cheaper.

For example, on the bullet repayment gold loan product, State Bank of India, country’s largest bank, is charging borrowers 8.65 per cent interest for 3 months; 8.70 per cent for 6 months and 8.80 per cent for 12 months. In the case of Muthoot Finance, India’s largest gold finance company, the minimum interest rate starts from 9 per cent, if interest is serviced monthly.

More focus on gold

BK Divakara, Chief Financial Officer, CSB Bank, said that earlier, banks were not focussing on gold loans. Most of them started focussing on this segment a little before the onset of Covid and it gained traction during the pandemic.

“It is a secured product. And even from the capital adequacy point of view, it is a zero risk asset because  the collateral is gold,” he said.

He underscored that the rate of interest at which banks offer loan against gold jewellery is far lesser vis-a-vis NBFCs.

“About 50 per cent of NBFCs’ funding is through bank loans. They borrow from banks and lend. So, when NBFCs add their margin, their lending rate becomes high.

 “Now since banks themselves are offering gold loans, naturally, their rate of interest will be low,” Divakara said.

Separate vertical for gold loans

Earlier, banks were focussing only on agriculture gold loans because they get classified as agriculture advances within priority sector lending. They were not that keen on general gold loans.

“But now banks have created a separate vertical dedicated to gold loans. They have started recruiting staff from old generation private sector banks and NBFCs so that the gold loans business can be handled very effectively,” Divakara said.

In a recent interaction with businessline, George Alexander Muthoot, Managing Director, Muthoot Finance, acknowledged the increasing competition in the gold loans space, with banks looking to expand their gold loan portfolio and new NBFCs coming into this space.

He emphasised that the trend of others (banks and NBFCs) coming in and trying to take away business will be short-lived.

“This is an operationally intensive business -- collecting gold, storing it, insurance, customer fraud, staff fraud, etc...It is challenging.

“We do our business with our own staff. Banks and others rely on outsourcing. The collateral (gold) is valuable. They are using third parties to collect gold from customer’s house. But our own staff go to the customer’s place,” Muthoot said.