Gold-loan NBFCs maintain market share despite competition from banks: CRISIL

Gold-loan focussed non-banking financial companies (NBFCs) have maintained a reasonably resilient market share despite intense competition from banks, CRISIL Ratings said.

Steady market share, support from strong capitalisation, sharp focus on risk management and healthy profitability has meant their credit profiles remain stable, according to a report by the credit rating agency.

In FY24 (up to September 2023), the market share of gold loan NBFCs was 61 per cent (62 per cent in FY23), with banks accounting for the rest.

In the first half of this fiscal, NBFCs matched banks by growing at 10-11 per cent (non-annualised).

Growth in the assets under management (AUM) of gold-loan NBFCs has been driven by three factors: ability to hold on to their customers — as evinced in a steady base; focus on small and mid-size loans; and increasing reach by expanding branch networks.

These trends have meant the market share of gold-loan NBFCs has been resilient at over 60 per cent between March 2021 to September 2023, despite strong competition from banks.

While NBFCs are known for their servicing agility, banks have focused on borrowers seeking bigger loans and competitive interest rates, the report said.

Banks sharpen focus on non-agricultural gold loans

“On their part, banks have sharpened focus on non-agricultural gold loans for personal use, particularly in the Rs 3 lakh and above ticket sizes, over the past three years.

“On the other hand, NBFCs have adopted steps to sustain their growth rate and market share,” CRISIL said.

Malvika Bhotika, Director, CRISIL Ratings, said: “Gold-loan NBFCs have bolstered clientele and managed growth by opening branches in new geographies, offering online gold loans and door-step services, and deploying marketing strategies to target inactive customers.”

The agency observed that growth for gold-loan NBFCs is influenced by change in the price of the precious metal.

In fiscal 2023, gold prices rose about 10 per cent, with the loan books rising in tandem, supported by bigger ticket sizes. Similar was the trend in the first-half of this fiscal, with prices rising about 13 per cent, while the AUM of gold-loan NBFCs grew about 10 per cent sequentially.

Credit cost in check

“From an asset quality perspective, holding timely auctions has kept the credit cost — an apt gauge of gold-loan asset quality — in check, at 0.2-0.4 per cent historically (including in pandemic-impacted fiscal 2022). Last fiscal, the credit cost was ~0.3 per cent,” per the report.

CRISIL Ratings emphasised that discipline on loan-to-value (LTV) and auctions remains high, as gold-loan NBFCs maintain a sharp focus on risk management. The average portfolio LTV has remained range-bound at 65-70 per cent over the years.

Lending yields have been on an uptrend over the past two quarters. Yields had fallen in fiscal 2022 and the first-half of fiscal 2023, as NBFCs looked to attract new customers with competitive pricing.

However, with leading players largely discontinuing these schemes, yields have inched up again.

The agency said lending spreads will continue to be over 10 per cent, backed by the ability to pass on the rate increases to customers. And profitability, as measured by return-on-managed assets, is expected to stay comfortable in the 3.5-5 per cent range for large gold-loan NBFCs.

Prashant Mane, Associate Director, CRISIL Ratings, said: “Healthy profitability, leading to robust internal accrual, will continue to support growth without the need for any external equity infusion. Consequently, gearing levels are expected to remain comfortable at less than three times over the medium term.”

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