Experts predict that banks would have the upper hand in the gold loan market as a result of the Reserve Bank of India's (RBI) actions against bellwether IIFL Finance. The main reason for this is that non-banking financing businesses (NBFCs) would need to reevaluate their distribution strategies. They could also need to implement strict procedures in order to comply.
"Banks' gold loan portfolios have expanded considerably faster than those of NBFCs. Banks' market shares will rise as the sector grows and becomes more standardized. It would resemble the home financing sector, in which banks have gained a sizable proportion of the market, according to Sanjay Agarwal, Senior Director at CareEdge Ratings.
As of September, banks accounted for 39% of the gold loan market share, with NBFCs holding a 61% share. According to a recent study by CRISIL Ratings, the total credit amount for gold loans increased to Rs 2.5 trillion as of September 30, up from Rs 1.9 trillion as of March 2021.
The RBI ordered IIFL Finance to cease authorizing, paying off, assigning, securitizing, and selling any of its gold loans earlier in March. Nonetheless, the business can keep up with its current gold loan portfolio by using standard procedures for recovery and collection.
The central bank noted in its letter that it had discovered many serious supervisory issues with the company's gold loan portfolio, including violations of the loan-to-value ratio and a sizable disbursement and collection of loan amounts in cash that were much beyond the statutory limit.
After implementing a number of significant, methodical modifications to its operational procedures, IIFL Finance subsequently submitted a compliance report to the RBI, which will begin its audit of the business on April 12.
Following the action taken by the RBI against the third-largest gold loan financier, other lenders are allegedly searching for a substitute for making cash disbursements for gold loans.In addition, the limitations imposed on IIFL Finance have raised questions about the viability of fast gold lending programs, which are well-liked by NBFC clients.
Banks would probably see an increase in their share if NBFCs reduce the amount of gold loans they are disbursing.Though banks would also pick and select their clients, not all of it will go to banks, according to Karan Gupta, Director and Head of Financial Institutions, India Ratings and Research.
Gold loan-oriented According to analysts, NBFCs have carved out a place for themselves by providing extra services like doorstep services and short disbursement turnaround times, in addition to having a larger network with branches available in remote areas. Banks provide loans more than Rs 3 lakh, whereas NBFCs usually make loans with relatively lower ticket sizes. 75 percent of the market value of the gold is the highest loan-to-value ratio allowed.
Though from a lower basis, banks' retail gold loan portfolio has grown far more quickly than NBFCs'. According to a research by ICRA Ratings, banks' gold loan portfolios have increased at a compound annual growth rate of almost 37% during the previous five years. However, over the previous five years, the gold loan book of NBFCs has only increased by 17%. In terms of gold loans, analysts believe banks are going to emphasize their advantages due to increased regulatory scrutiny over the NBFC sector.
For a number of factors, banks are likely to gain market share in gold loans compared to NBFCs, according to Fali Hodiwalla, Partner, Financial Services Consulting, EY India.
First off, according to Hodiwalla, banks are able to approve and distribute loans more swiftly than NBFCs because of their historical branch network and liability franchise. Banks are also able to offer loans at interest rates that may be lower than those of traditional NBFCs since they have access to cheaper cost of funds. Furthermore, banks with extensive branch networks do not have to start from scratch to construct the physical infrastructure required for assessing and holding physical gold. Last but not least, banks are inherently trusted by their patrons, which is important in the gold industry.
Experts note that banks are quickly expanding their presence in rural and semiurban regions, even if certain NBFCs have the advantage in terms of geographic penetration and access to the underbanked population. NBFCs and organizations such as HDFC Bank, IndusInd Bank, and DCB Bank have collaborated to offer gold loans.In a co-lending agreement, the bank's balance sheet shows 80% of the loan.Conversely, the collaborating NBFC will create and handle gold loans based on jointly developed credit guidelines and qualifying standards.
"We think there is enough room for growth for both banks and NBFCs over the long run, given that the size of the gold loan market has been growing and untapped opportunities continue to exist," stated Senior Director of CRISIL Ratings, Ajit Velonie.
