NBFCs See Record 26% YoY Growth in Gold Loans, Hitting ₹79,218 Crore in Q1FY25

Have you noticed how quickly gold loans are gaining momentum in India? In a notable shift, gold loans have become the fastest-growing segment for Non-Banking Financial Companies (NBFCs).

According to the latest data from the Finance Industry Development Council (FIDC), gold loans surged by an impressive 26% year-on-year (YoY) in the first quarter of FY25, reaching a total of ₹79,218 crore. This rise comes even as personal loan sanctions—a historically dominant category—fell by 4% during the same period. Source: Economic Times

Shift from Personal to Secured Gold Loans

This marked change is a stark contrast to last year when personal loans held the top spot for loan sanctions by NBFCs, amounting to ₹63,495 crore in Q1FY24. However, with the Reserve Bank of India (RBI) increasing the risk weight for unsecured loans in November 2022, NBFCs have shifted their focus toward more secure, collateral-backed loans. As a result, personal loans have taken a backseat, and gold loans have emerged as a preferred choice. Source: Economic Times

To give some context, risk weights determine the amount of capital financial institutions must hold against potential losses. When the RBI raised the risk weight for unsecured consumer loans to 125% from 100%, it effectively made these loans more expensive for lenders to offer. This regulatory move has pushed NBFCs to concentrate on safer, higher-yielding gold loans, where the collateralized nature of the loan mitigates risk. Source: Economic Times

RBI’s Regulatory Scrutiny on Gold Loan Practices

The rapid growth of gold loans hasn’t gone unnoticed by the regulator. In a recent announcement, the RBI cautioned lenders about irregularities in gold loan practices, threatening regulatory action if corrective steps aren’t taken within three months. The central bank pointed out several concerning practices, including third-party loan sourcing, lack of transparency in gold auctions following customer defaults, and improper valuation of gold.

This heightened scrutiny reminds us that despite the growing popularity of gold loans, the asset class remains heavily regulated. From branch openings to collateral storage and the auction process, NBFCs need to comply with strict rules. As gold loan portfolios continue to grow, operational efficiency and compliance will be essential for the industry to sustain this upward trajectory.

Gold Loans Outpace Other Lending Categories

The FIDC data shows that gold loans are now leading the charge, surpassing personal loans with a notable difference—₹79,218 crore for gold loans versus ₹71,306 crore for personal loans. Housing loans remain the third-largest segment, but property loans—growing at 21% YoY—have climbed to the fourth-largest category, overtaking unsecured business loans, which have slowed down due to the increased risk weights. Source: Economic Times

This shift reflects a broader trend in the financial landscape, where lenders are increasingly moving away from unsecured loans. Both banks and NBFCs have curtailed lending in this segment following the RBI’s regulatory adjustments. RBI data shows that even banks have shifted focus to gold loans, with the gold loan portfolio for banks expanding by 41% in August 2023, making it the second-fastest growing loan category after renewable energy projects. Source: Financial Express

NBFCs Maintain Stronghold in Retail Gold Loans

Despite the rapid growth in bank-backed gold loans, NBFCs remain dominant in the retail gold loan market. According to ICRA, NBFCs are expected to grow their gold loan portfolios by 17-19% in FY25. While their yields have moderated compared to the peaks of 4-5 years ago, the competitive intensity has softened, allowing some margin expansion. This growth is expected to continue at a compound annual growth rate (CAGR) of 14-15% between FY26 and FY27. Source: Financial Express

Interestingly, the growth of the gold loan market for NBFCs has been fueled not just by gold prices but also by modest growth in collateral tonnage and branch expansions. Larger NBFC players saw a 3-4% increase in the cargo of gold held as collateral between FY20 and FY24, while their gold loan books grew by 18%. Despite these positive growth trends, the NBFC gold loan market remains highly concentrated, with the top four players accounting for 83% of the total market share as of March 2024.
Source: Financial Express

Outlook for NBFCs: Strong but Regulated Growth

The outlook for NBFCs in the gold loan space is bright. As the competitive pressures ease, NBFCs will likely continue benefiting from an expanding gold loan market, supported by buoyant gold prices and a steady demand for secured loans. Access to collateral and the liquid nature of gold significantly reduce credit risk for lenders. In cases of loan defaults, timely auctions of collateral have ensured healthy realizations, which, in turn, help keep credit costs low.

However, the industry’s reliance on regulatory compliance and operational efficiency cannot be overstated. With gold loans being subject to stringent rules on everything from collateral valuation to the auction process, NBFCs must focus on improving their operating efficiencies to sustain growth and profitability. The sector has already started adapting to regulatory changes, such as the RBI’s directive restricting cash disbursements on loans exceeding ₹20,000. Many players are also increasingly adopting digital lending platforms to enhance operational leverage and reach a broader customer base.

Source: Financial Express

The shift towards gold loans as the leading segment in NBFC loan sanctions highlights the evolving dynamics in the lending landscape. With regulatory changes prompting a move from unsecured loans, gold loans have emerged as a secure, high-growth category. The challenge now for NBFCs is to balance growth with regulatory compliance and operational efficiency as they continue to expand their market share in this highly competitive segment.

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