Industry experts expect demand for gold loans to surge as unorganised sector gets back on track

Gold loans are expected to find more takers in the current quarter as well as in the next financial year owing to the likely reopening of academic institutions, pickup in micro and small industries and the return of migrant workers, said industry executives and experts.

Gold loan companies are expecting more than 20% growth year-on-year in assets under management (AUM) in this financial year.

“We have achieved a growth in gold loan AUM of 19% in the first nine months of this fiscal,” said VP Nandakumar, managing director, Manappuram Finance. “A significant chunk of this growth came in Q2 (when gold loan AUM went up sequentially by 11%) after the lockdowns were eased. This was a time when the overall credit flow in the economy was still choked up.”

Banks and non-banking financial companies resumed lending in the third quarter of the fiscal and the demand was sustained by the rebound in economic activities, said Nandakumar. “Likewise, in Q4 we expect that as the unorganised sector gets back on track, demand for gold loans will endure. For FY21 we expect a growth of 20% plus,” he said.

Nandakumar said the outlook for gold loan demand remains strong, especially with the expected V-shaped recovery in economic growth. In 2021-22, the industry expects 15-20% growth, even as the base is larger, he said.

Umesh Mohanan, executive director of Indel Money also exuded optimism. “Gold loan demand in both urban and rural regions is expected to pick up, as livelihood is gradually returning to the pre-Covid level in the post-lockdown phase,” he said. “In fact, the gold loan demand in Q4FY21 will grow at a more increased pace than Q3FY21 because the pace of economic recovery and easing of credit availability is not in tandem at the moment. As a result, gold loans have emerged as a perfect option to raise working capital thanks to their easy credit manoeuvrability.”

Gold loans are essentially short-term loans and small and medium-sized enterprises (SME) use them as bridge loans to meet their temporary working capital requirements, with repayments in three-four months, said executives. SME borrowers prefer gold loans as a reliable source for immediate funds to meet their extra working funding requirements because banks take time to process and sanction additional working capital funds, they said.

“Gold loan offtake during Q3 was in tune with our expectations and the same trend is expected to continue in Q4,” said George Alexander Muthoot, managing director, Muthoot Finance.

Banks are also now aggressive in gold loan business. Banks normally charge 1% processing fee in addition to appraiser fee on gold loans, which adds up to 4% to the interest rate of a three-month gold loan by a bank. “Hence, our customers are aware that our rate of interest is comparable with banks,” said Muthoot.

Courtesy: Economic Times