Spike in Gold Loans in Covid-19
Despite a spike in gold loans in April and May, the economic uncertainty created by the outbreak of Covid-19 and the 70-day lockdown have not enthused small businesses and individuals to pledge household gold with the gold loan non-banking finance companies (NBFC) for quick money.
Gold loan is mostly taken by small businesses and SME sector. Though NBFCs saw an initial spike in gold in loans offtake when branches reopened after six weeks of lockdown, the momentum was not sustained.
In April and May, the increase in business volumes came more from existing customers taking advantage of higher loan-to-value (LTV) due to a spike in gold prices to increase their borrowings against existing pledges. But absolute footfalls have not increased and the acquisition of new customers has not picked up.
Besides, gold loan NBFCs are facing competition from the public sector banks who are giving working capital loans at 7.5%, though the NBFCs say banks take more time to process loan applications, unlike NBFCs that much quicker in disbursing loans.
“The cost of funds for banks is much lower than for NBFCs, hence NBFCs cannot compete with them on interest rates. However, for the customer, what the gold loan NBFCs bring to the table is the ease of process and availability of credit whenever and wherever it is needed. Besides, gold loans are typically small-ticket loans that get repaid within two to three months, so the rate of interest cannot be the key differentiator,” said V.P. Nandakumar, MD, and CEO, Manappuram Finance.
Nandakumar said that the initial surge, when branches reopened after six weeks of lockdown, was not sustained. “Our experience in April and May was that the increase in business volumes came more from existing customers taking advantage of higher LTV to increase their borrowings against existing pledges. We did not observe an increase in the absolute number of customers during this period. We presume this was because public transport was yet to resume, which affected customer footfalls.
“Gold loan per gram NBFCs are seen as the alternate source for immediate and easy funding by the business community; as bridge finance to restart their operations till the bank finance is released. Our interest rate is comparable with banks and they can avail loan against the security of their gold for any amount in case of emergency without having to comply with working capital assessment norms stipulated in the case of bank finance,” said George Alexander Muthoot, MD, Muthoot Finance.
Muthoot Finance saw that the revival of economic activity pushed up demand for liquidity from SME sector. “We are hopeful of regaining our lost business during the lockdown period by the end of September,” said Muthoot.