The report indicates that growth trends are visible, with June seeing a 12% increase in loans disbursed compared to the average monthly loans of the previous quarter.
Excluding one major player in the sector, the growth stands at 23% above the industry average.
NBFCs lead in gold loan distribution
Non-Banking Financial Companies (NBFCs) have taken the lead in distributing gold loans, holding 90% of the total assets under management (AUM) in the sector, as per the report.
The surge in gold prices has been the primary driver of growth for gold loan NBFCs.
These companies are well-positioned to handle the risks associated with gold price fluctuations, with most maintaining a Loan-to-Value (LTV) ratio of 60-65%.
This means that companies only disburse loans amounting to 60-65% of the gold’s value based on the customer’s profile, minimising their exposure to gold price drops, even after the government’s import duty cuts.
Impact of RBI’s cash loan restrictions
However, CRISIL Ratings also pointed out that the Reserve Bank of India’s (RBI) recent directive on cash disbursements could have some impact.
The RBI has advised that gold loans exceeding ₹20,000 should not be disbursed in cash but through banking channels.
Previously, NBFCs provided 95% of gold loans in cash for customer convenience.
Moving towards digital disbursements could affect the loan issuance process for new customers.
Who should consider a gold loan and how
Gold loans are ideal for individuals who need quick access to funds without selling their assets.
These loans are secured, meaning they typically have lower interest rates than personal loans.
However, it’s important for borrowers to understand the terms, especially the LTV ratio, to ensure they don’t overborrow and risk losing their gold in case of default.
Before opting for a gold loan, borrowers should:
Assess the Interest Rates: Compare rates across banks and NBFCs to find the most competitive offer.
Understand the LTV Ratio: Be mindful of the percentage of gold value you’re borrowing against and how it impacts your repayment.
Plan for Repayment: Make sure you can repay the loan on time to avoid high penalties or loss of gold.
Prefer Digital Channels: With new regulations, moving towards digital payments will streamline the process and keep you within legal limits.
Gold loans can be a smart option for short-term financial needs, but careful planning and understanding of the terms are crucial to making the most of this growing trend.