Golds loans, which were in high demand till a few years ago, may see a decline, mainly due to subdued future outlook of gold prices and the advent of fintech players, which has made credit appraisals quick for lenders.
While gold loans are not a new product, it is only in the recent past that Indian households have started losing their inhibition over pledging goldwith financial institutions for quick loan disbursement without going through the hassles of credit appraisal.
One of the advantages of gold loans is the quick turnaround time —as low as a few minutes from a customervisiting the branch of a bank or non-banking finance company. In addition, only minimum paper work is required. However, things could be changing due to multiple factors.
According to a KPMG report, the advent of fintechs in the lending space could be one reason, as personal loans can be offered in minimum time.
Traditional option
“Gold loan was traditionally the go-to option for those who could not secure personal loan due to lack of formal credit history. Prime lenders today are partnering with fintechs who help develop credit score with alternative data based on machine learning, natural language processing and artificial intelligence. This has made the process of obtaining an unsecured personal loan easier and convenient,” the report said. However, gold loan players said the convenience of a gold loan would be difficult to be matched by any other credit product any time soon.
“With technology, there can be a shift on how credit is delivered to the informal borrower,” said John Muthoot, chairman, Muthoot Fincorp, one of the leading NBFCs for gold loans.
“But one has to understand that gold loans are small loans to informal customers averaging around ₹30,000. The convenience of a gold loan is quick disbursement within minutes with minimum paper work,from an outlet, which is close to the customer,” Mr. Muthoot said.
The other challenge that gold loan companies face is the subdued outlook of gold prices, as lower prices will result in decline in the resale value of gold which can lead to defaults.
“Despite the limited upmove in gold prices in 2017, the World Gold Council expects the prices to reduce in the next two to three years. This is dependent on the state of the US dollar and the interest rate set by U.S. Federal Reserve,” the KPMG report said.
“The volatility entails market risk and the possibility of gold loans going out of money. Lower gold prices also imply that the resale value of gold will decline. As a consequence, a borrower loses his eagerness to repay and the default rate increases,” it said.
Mr. Muthoot, however, said that the rupee was appreciating against the dollar, and gold prices were inversely linked to the dollar.
‘Prices to stabilise’
“Gold prices are expected to stabilise in the range of $1,250-1,350 per ounce in the short term. In 2017 also, prices were hovering around this range. And going forward, I see more price stabilisation, provided no geopolitical tensionis flaring up. If dollar weakens, then gold prices are expected to move up in dollar terms. There is an inverse correlation between dollar and gold,” he said.
Mr. Muthoot added that gold loan disbursements had stabilised in the last two years. “The demand for gold loans is coming back gradually. Last financial year (2016-17), our asset under management (AUM) grew by 28%. This year, we are not seeing that kind of numbers, but would be little early to say as we have another quarter to go,” he added.
