Gold finance industry shows upward trend
The organized non-farm gold finance industry has grown over the past 12 years from a small base of Rs 200 crore in 2009 to Rs 20,000 crore today. Interestingly, only 35 percent of this industry is formal in India and around 40 percent is with NBFCs. A report from Motilal Oswal says gold lending financiers have created a strong proposition over banks with faster turnaround time, niche customer base, easy access to a large branch network focused only on gold loans and flexible repayment schedules. Despite the higher interest rate, gold financiers have managed to gain market share over the past five years in the organized segment thanks to these advantages. The market has also seen a surge as customers whose cash flows have been disrupted during the pandemic seek to leverage their gold holdings. With over 80 percent of the business coming from loyal customers, there is significant room for growth.
Interestingly, the gold lending market in India is dominated by specialist gold financiers such as Muthoot Finance, Manappuram Finance, and Muthoot Fincorp. The report observes that the demand for gold loans is healthy in the current environment and that over the past five years, gold financiers have delivered 6-7% CAGR in tonnage of gold with a Broadly similar CAGR in terms of additional customers. Prices also stood at 6-7 percent CAGR over the same period, resulting in a 13 percent CAGR in assets under management (AUM) in fiscal year 15-20.
Interestingly, in the current scenario, gold financiers should benefit, as in the current pandemic situation their clients would be looking to raise funds by leveraging their gold holdings, and a price increase of gold would provide a modest boost to growth. Inability of clients to obtain personal loans due to lack of official documents, untapped opportunities, especially in non-southern regions, and a higher share of rural activity, which is doing well, are other drivers. of the gold loan market. Additionally, many of these formal gold financiers have flexible loan terms.
The Motilal report stresses that the blow to the sector from regulatory arbitrage should be a temporary phenomenon. Recently, the RBI had increased the loan-to-value ratio (LTV) cap on gold lending for banks from 75% to 90% for loans disbursed until March 31, 2021, after which it would drop to 75%. . However, the cap remains at 75 percent for NBFCs.
“I think this would only have a modest impact, as several clients were taking out loans at 60-65 percent LTV despite the 75 percent LTV cap. In addition to this, banks may not be willing to lend up to 90% LTV from a risk management perspective and the branch network of NBFCs is also deeper and their turnaround time is much longer. faster than that of banks, ”noted Alpesh Mehta, research analyst. at Motilal Oswal.
According to the World Gold Council (WGC), India and China account for almost half of the world’s demand for gold. In 2019, India accounted for 16% of the global demand for gold. Over the past two decades, the demand for gold has been stable, mostly between 700 and 900 tonnes per year. While demand for gold has been healthy, gold financing penetration in India has remained low at just 3.5% of gold held. At the same time, while gold prices may fluctuate over the medium term, they have followed a steady uptrend in the long term. Over the past 10-15 years, gold prices have generated a CAGR of around 10-15%. India is a big consumer of gold, but the levels of monetization are low. In India, about two-thirds of gold holdings are mostly concentrated in the country’s rural pockets. According to a KPMG analysis report, the total outstanding gold loans in the organized sector represented less than 5% of total household gold holdings in India, indicating significantly low penetration.
An interesting trend that was seen in a recent CRISIL report is that gold jewelry retailers may reduce their store expansion due to increased cash flow and higher inventory during this fiscal year. . Weak demand leading to reduced cash build-ups, high inventory levels and reduced bank funding will lead to a moderately negative credit outlook for gold jewelry retailers in this brutal fiscal and restrained store expansion. The CRISIL report observes that the number of new store additions is expected to decrease to nearly a third of the average between fiscal years 2017 and 2020. Consequently, capital investments will be 70% lower at Rs 650-700 crore this fiscal year. compared to the average. of the last four years.
The report points out that sales volume would plunge due to reduced discretionary spending in the wake of the COVID-19 pandemic, with stores remaining closed for most of the first quarter and intermittent closures in some states in the second quarter. The CRISIL report further indicates that the overall revenues of gold jewelry retailers would fall by an average of 20 to 25 percent this fiscal year. But the operating profitability of these retailers will only experience a limited decline of 100 to 150 basis points to 4.2 to 4.7% for reasons such as cost optimization measures, including renegotiation of rentals. , reduction of personnel costs and reduction of promotional expenses; and also a surge in gold prices which may allow for tactical promotions such as lower jewelry making costs to support revenues without significantly affecting margins.