Gold loan is a commodity business. If you take a home loan or vehicle loan or business loan, your repayment ability is the highest priority for any loan lender. Even though the loan is sufficiently collateralized, banks always prefer to get money from repayment rather than auction the asset and getting the money. Reason it is very difficult for lender to recover money in auctions and it’s a very long process. But in case of gold loan it is very easy for banks or nbfc to auction the gold and get back the money. This is the same reason on why we cannot compare a home loan from Bank versus home loan from an nbfc with gold loan from my bank versus gold loan from nbfc.
Unlike other loans where we classify loans accordingly to the credit risk and banks provides low risk loans where nbfc provide high risk loans, gold loan is classified on its maturity since there is a no credit risk involved. Here banks willing to take longer maturity loans and nbfcs like manappuram less maturity loans.
When did think about gold loans we can even get parallel from microfinance loans. Even though microfinance loans higher amount of margin still there is a huge operational expenditure associated with the loans and they are of high churn. Bank generally do not like loans which have a shorter maturity time and high opex, so they always prefer a longer maturity loan since for a longer maturity loans, opex is comparatively small.
How I say why Muthoot and manappuram is preferring low maturity loans? You can see from management commentary where Muthoot say majority loans mature from 3 to 6 months.
And nbfc has higher proportionate of loans where we will just pay interest and preclose at any time rather than EMI. Majority banks always prefer to go with EMI (exception is agri related gold loans).
For providing gold loans you need a separate infrastructure which is entirely different from vehicle loan or business loan or home loans. We need a gold assessor, he have to sit in bank to process as and when customer reaches. But when you reach many banks for gold loans they typically do gold loans once in a week.
This is what changing right now many banks are appointing some gold assessor. Whenever we see competition from Bank, we directly look for CSB Bank, federal Bank, they are in no mood to reduce their gold loan portfolio. Even many PSU banks have increased their gold loan portfolio even after excluding agri related gold loans. And their growth rate is 20% plus
Some might argue banks burnt their fingers during covid in gold loans. The decision to move LTV from 75 percentage 90 percentage during covid for banks is a socialist move done by RBI to support the economy, not to make banks more competitive than nbfc. Everyone knows 90% LTV is risky, that’s why RBI want to do this only with banks, not with nbfcs. But unfortunately during the time gold price turn downwards. Even with or without this reduction in gold price, RBI would definitely changed the LTV back to 75 percentage.
On what is difference in customers between them, Customers with small loan ticket size with very short term fund, they will stick with nbfcs and customers with long term fund need and a bigger ticket size, they definitely prefer banks.
Every customer who gets loan from NBFC also can get a gold loan from bank. Unless branch manager decided to not to lend him, may be because of some existing default in his name or some fraud. I don’t agree with things like people don’t have bank account prefer nbfcs, since most of the disbursement is on online only and in case of parallel economy money also these transactions will still get track, only this people wont report this to credit bureau but still there will be a KYC for these loans.
Disclosure: Exited manappuram recently and have position in IIFL
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