Banks' Gold Loan Growth Slows Due To Rising Competition & Higher Gold Prices

The rapid expansion observed in banks' gold loan portfolios is now showing signs of slowing down, attributed to heightened competition from gold loan companies and fintech firms, coupled with soaring gold prices dampening individuals' purchasing power for the precious metal.

According to Reserve Bank of India data, the year-on-year growth in loans against gold jewellery offered by banks has tapered to 15 per cent in February, down from 26 per cent in June 2023.

"Individuals are buying less gold due to the substantial price surge over the past year, resulting in reduced quantities available for pledging," stated the head of consumer banking at a private bank.

Competition from gold loan companies and fintech players, particularly in semi-urban and rural regions, is intensifying, contributing to the moderation in banks' gold loan growth.

The surge in gold prices, driven by global factors like expectations of a US Fed rate cut and increased purchases by global central banks, is a significant factor driving individuals towards gold loans.

Bankers anticipate continued growth in gold loans as higher gold prices enable borrowers to access larger loan amounts against the same quality and quantity of gold pledged.

The current price of gold, hovering around Rs 71,000 per 10 grams, reflects a substantial 22 per cent increase from the end of March 2023 when prices were at Rs 58,000 per 10 grams.

"The sustained uptrend in gold prices has diminished individuals' ability to purchase gold, intensifying competition among banks, gold loan companies, and fintech firms," remarked Madhavankutty G, Group Chief Economist at Manappuram Finance.

In response to increased regulatory requirements and rising capital costs, several fintech firms have shifted focus to secured loans like gold loans. This shift comes after the RBI raised risk weight requirements for unsecured loans in November last year, prompting fintech firms to diversify their product offerings.

"The rise in capital costs following the RBI's regulatory changes has prompted us to diversify our product range, leading to the introduction of gold loans alongside our previous focus on personal loans," explained a senior official at a fintech firm.