Despite Cash Disbursement Restriction, Gold-loan NBFCs Shine

Non-banking financial companies (NBFCs) focusing on gold loans are expected to see reasonable growth in disbursements this fiscal as demand for credit remains strong, said Crisil Ratings. Their growth in the recent past has been underpinned by operational resilience, agility and adaptability to evolving regulations. A key regulatory development this fiscal was the advisory in May 2024 that curbed cash disbursements.

The rating agency added that the growth for gold-loan NBFCs has also been supported by favourable movements in gold prices. Moreover, given their robust risk management practices, these NBFCs are well placed to withstand adverse gold price fluctuations as seen in the past few weeks.

A Crisil Ratings analysis of gold-loan NBFCs accounting for over 90 per cent of the industry assets under management (AUM), indicates as much. Ajit Velonie, Senior Director, Crisil Ratings said, "Early evidence of growth momentum is seen in the disbursements for June 2024, which were 12 per cent higher than the average monthly disbursements in the preceding quarter. Excluding one large player2, the growth was even higher at 23 per cent.”

The May advisory from the Reserve Bank of India (RBI) to a few gold-loan NBFCs recommended adherence to the provisions of the Income Tax Act. That meant loans could not be disbursed in cash more than Rs 20,000. Anything more has to be disbursed through banking channels such as the National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS) or the Unified Payments Interface (UPI).

Following the RBI directive, Crisil Ratings, in its credit bulletin dated 21 May had indicated that the shift to digital channels for gold-loan disbursements could impact growth in new disbursements. Previously, up to 95 per cent of gold-loan disbursements by NBFCs were in cash— essentially to provide quick service to borrowers.

Since then, NBFCs have smoothly transitioned to digital channels with only a slight increase in turnaround time, which has helped them maintain their edge over banks. This has been made possible due to their existing infrastructure and technology, which already supported online disbursements for larger loan amounts, as well as educating borrowers to use digital modes.

Malvika Bhotika, Director, Crisil Ratings said, “To be sure, NBFCs have been grappling with gold prices, which have declined after the reduction in customs duty announced in the full Union Budget for this fiscal. Even so, the declining gold prices have not affected gold-loan NBFCs materially for two reasons. One, CRISIL Ratings estimates the portfolio loan-to-value (LTV) range for these NBFCs was low at 60 to 65 per cent (on a mark-to-market basis) as on June 30, 2024, which provides adequate cushion to manage unfavourable movement in gold prices. Two, these NBFCs have typically focused on periodic interest collection, keeping LTV under check.”

Any sharp fall in gold prices and their sustenance at the lower level for long would bear watching, according to the rating agency. To mitigate this risk, aside from periodic interest collection, gold-loan NBFCs would need to monitor LTV closely and conduct auctions in a timely manner.