Banks’ loans against gold jewellery shoot up 56% as focus shifts to secured loans

Banks’ loans against gold jewellery rose 56 per cent year-on-year (y-o-y) to ₹1.54 lakh crore as on October 18, sharply higher than 13 per cent growth seen in October 2023, as lenders shift focus from unsecured loans to secured ones, higher demand due to rise in gold prices, and as lenders introduce appealing gold loan products.

In comparison, unsecured loans such as consumer durable loans grew at 7 per cent y-o-y in October as against 8 per cent in same period last year, and credit card outstanding loans grew 17 per cent y-o-y versus 28 per cent last year, according to the Reserve Bank of India (RBI) data.

Move towards secured lending

The rise in lenders’ gold loan portfolio and fall in unsecured loans can be attributed to the RBI’s hike in risk weights on unsecured personal loans in November last year, bankers say.

George Muthoot, MD of largest gold loan non-banking finance company (NBFC) Muthoot Finance, said lenders have slowed down unsecured loan growth due to higher risk weights by RBI and repeated cautioning by the regulator and finance ministry. He said earlier consumers were also receiving personal loans from fintechs, which has dried up now.

“But people still need money to have purchasing power. I compare this scenario to Covid-19 period, when unsecured lending came to a halt. As people needed funds, the next best option was gold loans, and we were able to help lots of people during those times,” he said.

“That is when our gold loan business also grew. I see that we are back at the same position…Of course, gold prices play a part, but more pre-dominantly demand is the main driver for growth…,” he added.

Innovative products

Shaji Varghese, CEO, Muthoot FinCorp, says the NBFC grew its on book assets by 18 per cent y-o-y in H1FY25 and it hopes to continue the trend in H2FY25. Outstanding gold loans receivables at the end of September 2024 stood at Rs 20,544 crore, he said.

“Gold loan has been growing steadily since the past few quarters owing to its own strong features including zero prepayment charges unlike personal loans, daily repayment & interest only on outstanding amount, flexibility in repayment, including bullet payment options and many more,” he said.

Robust growth outlook

Rajeev Yadav, Deputy CEO, AU Small Finance Bank (SFB), says the lender witnessed significant growth in its gold loan portfolio in Q2FY25, driven by increased customer demand and due to the bank’s seamless accessible gold loan solutions.

“The gold loan segment experienced a robust growth of 11 per cent (quarter-on-quarter), reflecting our efforts to cater to evolving customer needs. Looking ahead to H2FY25, AU SFB remain optimistic about maintaining this growth trajectory,” he said.

Festive season and economic activities typically drive higher demand for gold loans, he says, and the lender is able to capitalise on these opportunities. “By leveraging our digital capabilities and expanding our reach, we anticipate the gold loan portfolio to grow at an annualized rate of 40 per cent, in alignment with our overarching strategy of portfolio diversification and customer-centric offerings,” he said.

However, according to CRISIL Ratings, the RBI’s warning to lenders using irregular practises in gold loans could lead to banks going slow on gold loan business.

Says Malvika Bhotika, Director at CRISIL Ratings, “Adherence (to new regulations) is likely to impact disbursements over the next few quarters and taper gold loan growth both for banks and NBFCs. That said, NBFCs are expected to adapt to the regulatory measures impacting their business within a reasonable timeframe, just as in the recent past, when limits were placed on cash disbursals.”