To take full advantage of the opportunity, scheduled commercial banks are attempting to diversify their gold loan portfolios in addition to small finance banks.
The only area of the banking industry seeing significant development is gold loans, notwithstanding the industry’s generally slow credit expansion. The demand from customers has increased due to rising gold prices.
By opening more branches and putting more staff on the ground, small finance banks are aggressively stepping up their attempts to take advantage of the opportunity and expand their gold loan portfolios. This also signifies a change in loan books from unsecured to secured.
“We are eager to expand the gold industry. With an emphasis on business banking clients via overdraft and customized offerings, we aim to serve customers in three segments: consumption, company development, and income creation. According to Murali Vaidyanathan, senior president and national head of branch banking at Equitas Small Finance Bank, “it would assist liberate capital by moving towards secured assets, hence enhancing liquidity and capital efficiency.”
According to RBI statistics, loans secured by jewelry increased 117% in August as opposed to 40% in the same month last year. As of August 22, the total amount of outstanding gold loans was Rs 62.13 lakh crore.
“We are now more focused on expanding the gold lending business as a result of rising gold prices. At the moment, we provide gold loans via a network of around 350 locations. Vibhas Chandra, head of microbanking and gold loans at Ujjivan Small Finance Bank, said, “We are aggressively striving to grow this footprint and boost presence to capitalize on new possibilities in the industry.”
The microfinance industry is causing stress for certain small financing institutions, thus lenders are attempting to diversify their portfolios by introducing secured products, of which gold loans are an appealing subset.
“By hiring additional employees, we want to grow across our current locations and asset centers. Our strategy will be resource-driven and operationally oriented since gold loans need a significant physical presence on the ground,” Vaidyanathan said.
Global demand and anticipation of rate cuts by the US Fed have caused gold prices to soar, hitting record highs in India. On Wednesday, international prices reached a record high of $4,194 per ounce. According to Bloomberg statistics, domestic prices increased to more than Rs 1,30,338 per 10 grams.
Due to the market risks associated with gold prices, lenders must tighten their credit underwriting procedures in order to control portfolio risk. Because of the small LTV margin, we presently restrict top-up loans to reduce mark-to-market risks. “We make sure the portfolio LTV remains below 75% and maintain a high average ticket size,” Vaidyanathan said.
The RBI increased the maximum loan-to-value (LTV) ratio for loans under Rs 2.5 lakh from 75% to 85% in accordance with the final guidelines released in June. Loans between Rs 2.5 lakh and Rs 5 lakh now have an LTV of 80%, while loans beyond Rs 5 lakh still have an LTV of 75%. For smaller-ticket loans, the regulator also eliminated the need for end-use monitoring and credit evaluation.
To take full advantage of the opportunity, scheduled commercial banks are attempting to diversify their gold loan portfolios in addition to small finance banks.