Banks are coming up with separate gold loan branches to woo customers away from NBFCs
The Non Banking Financial Companies (NBFC) are facing tough competition from banks in the gold loan segment by offering low interest rates. Commercial Banks have been expanding their gold loan portfolio. Data by BFSI shows that the portfolio saw a growth of 16.2 percent year on year growth.
Loan officials at commercial banks said that demand for gold loans went up after the pandemic. The pandemic caused many businesses to shut their operations down and many lost their jobs. During such times, gold loans provided a means of financial stability for borrowers
Subhojit Mohapatra, Assistant General Manager of Bank of Baroda, Race Course Road branch said, “Banks are just doing their business by capitalizing on the rising demand of gold loans. It is the way to grow our retail books and cash in on the demand for gold loans.”
Mohapatra further said that banks charge lower interest rates on gold loans compared to NBFCs. NBFCs charge higher interest rates to stay afloat. Due to this banks have been able to attract customers away from big gold loan companies.
Laxmi, manager at Nishka Finance Gold Company, Bengaluru said, “Our business has declined by 30 percent since the pandemic. It is partly because banks have pushed pricing strategies to gain advantage in gold loans and partly because of intense competition among NBFCs also affected our gross margins in gold loans.”
Data by Banking, Financial services and Insurance (BFSI) shows that NBFCs are losing market share, despite growth in gold loans. The data shows that the advance mix for NBFCs like Muthoot finance and Manappuram Gold is declining quarter to quarter in the financial year 2023. The share of gold in NBFS portfolio saw a reduction of nine percent in the third quarter on a Q-o-Q basis from 2022.
One of the loan officials at Punjab National Bank, Race Course Road said that currently the gold loan market underpenetrated. For organized gold financiers like banks and NBFCs, it is just one percent. The official said, “It is a very lucrative market. Customers, especially high net worth individuals trust banks more than NBFCs because banks provide them assurance that their money will not go anywhere. Also, the clearance process in banks is faster than NBFCs. So, for customers also, banks are a more reliable option than NBFCs.”
Besides, the official mentioned that higher gold loans have also allowed improvements in interest margins and non-performing assets. The gold loan disbursal in our branch have gone up by 60 percent and subsequently the interest margin has gone up by two percent.
Data by Reserve Bank of India (RBI) shows that the disbursal of gold loan amount has doubled from Rs 47,691 crore in September2020 to Rs 80,617 crore in September 2022. The same data shows that State Bank of India (SBI) saw a 21 percent increase in the gold loan segment, Bank of Baroda saw an increase of 62 percent, HDFC at 23 percent and Axis bank at 26 percent.
Kotak Mahindra bank launched 100 gold loan branches. HDFC branch is increasing their count to 5000 gold loan branches.
Divya Mishra, Professor of Macro Economics, Sophia Girls College, Ajmer said that banks should focus on higher ticket customers, ranging between Rs. two lakhs and Rs. five lakhs. NBFCs should focus on low ticket customers ranging between Rs 0.5 lakhs and two lakhs. It will create a win-win situation for both of the players. It will reduce the competition and help NBFCs in keeping their business afloat.
