High gold prices increased demand for gold loans amid pandemic: WGC Report

The incessant surge in gold prices led to higher demand for gold loans amid the pandemic and increased the asset under management of major gold loan NBFCs, according to a report by World Gold Council (WGC).

The report said that the outstanding organised gold loan is expected to grow to Rs 4,051 billion ($55.2 billion) in FY 2021 from Rs 3,448 billion ($47 billion) in FY 2020.

"The 28.8 per cent rally in the domestic gold price this year has led to increased demand for gold loans. Borrowers have benefited from higher loan value for the same collateral while lenders have benefited from lower loan-to-value (LTV) ratios on their existing loans and higher demand," it said.

With a higher gold price and greater liquidity needs arising with the onset of COVID-19, it was believed that COVID-19 would induce higher gold recycling from consumers. However, consumers used their gold holdings as collateral to obtain their financing needs rather than outright selling.

Also, the rural economy has performed strongly this year, reducing the need for distress selling.

"Demand during the pandemic has pushed gold loan AUM higher for India's leading gold loan NBFCs - the AUM of Muthoot Finance and Manappuram Finance increased by 15 per cent and 33.4 per cent y-o-y respectively in Q2 2020," it said.

Kerala-based Federal Bank reported a 36 per cent increase in gold loan AUM y-o-y in Q2 2020. Indian Bank has witnessed a 10 per cent increase in average ticket size of gold loans to Rs 88,000. Recent industry interaction and media articles have also mentioned higher demand for gold loans.

Banks have aggressively promoted and launched gold loan schemes since the outbreak to capitalise on these lucrative schemes, as per the report.

Somasundaram PR, Managing Director, India, World Gold Council said: "The gold loan industry has traditionally been a pillar of support for small businesses and households in need of emergency short term assistance. In  addition to unorganized lending that normally co-exists with any robust gold market, the regulated Institutional framework of "gold loans" in India has made it ubiquitous over the past decade which is indeed a boon."

He noted that Covid has boosted demand for gold loans through banks and non-banking financial companies.

"Gold loans will benefit not just from the demand side but supply-side dynamics too as many banks and non-banking institutions target this product segment on account of its acceptable risk profile," he added.