Gold loan companies, beware of banks!

CSB Bank, Federal Bank scale up gold loan book by 50 pc

KOCHI/October 27-2020: Banks are posing competition to gold loan companies in their turf that once believed to have been ‘ring-fenced’ from banks that have long been their major financiers too.

Of late, banks are seen feverishly building their gold loan books brushing aside the age-long question of propriety of banks being active in this ‘less respected and less sophisticated’ business seriously, and this would undoubtedly  unnerve the established gold loan companies that have been enjoying yields in the upwards of 20 per cent.

The thinking that the gold loan is a high-margin business with relatively low risk, at a time when businesses are struggling to hold up their bottom lines, is fast gaining acceptance among banks that currently scramble for good avenues to park their funds profitably.

The more discomforting thing for the gold loan companies would be that banks could make a killing even if they resort to a much lower interest than their gold loan counterparts charge. .

The gold loans offer banks the most ideal avenue with much better return, and that too with much less requirement of capital.

The scaling up of the gold loan business by the banks of late, not only captures the market share from the established gold loan companies, but more importantly, this seeks to close their funding taps as these banks have long been playing a crucial role in building the liability books of the leading gold loan companies.

Muthoot and Manappuram

The statistics of borrowings with regard to Muthoot Finance, the largest gold loan company, show that while its total borrowings as of June end, 2020, were to the tune of more than Rs39,000 crore, 40 per cent of it, at Rs15,645 crore, came from banks and financial institutions, against Rs13,773 crore a year ago

In the case of Manappuram, another big player in this segment, 55 per cent its total borrowings of Rs18,600 crore, estimated at Rs10,230 crore, was contributed by banks and financial institutions as of June end, 2020 – compared with Rs8,520 crore a year ago.

Moreover, these gold loan majors enjoy large undrawn credit lines from the banks, available on any given day.


Gold loans grew 47 pc for CSB Bank

As if the quantum of gold loans is not enough, CSB Bank (formerly Catholic Syrian Bank), on Tuesday, entered into a partnership with non-banking finance company, IIFL Finance (IIFL), for sourcing and managing retail gold loan assets.

A statement from CSB Bank on Tuesday said IIFL, acting as Business Correspondent (BC) of CSB Bank, will source new business from markets, where CSB Bank does not have adequate branch network.

It’s not that gold loan is new to the bank; CSB Bank’s gold loan book has already grown 47 per cent in the past one year alone from Rs3357.52 crore to Rs4938.98 crore, and currently accounts for almost 39 per cent of its total loans.

During the past one year, the bank’s loan book though grew by about 11 per cent, the total loans, sans gold loans, have contracted from Rs8045.41 crore to Rs7822.93 crore.

The CSB Bank MD, CVR Rajendran (2nd from top), has said the bank still has appetite to grow its gold loan book. Nirmal Jain, chairman of IIFL Finance, hailed the new partnership with CSB Bank as a win-win deal.

Federal Bank gold loan soars 54 pc

The Federal Bank that falls in the big league of private sector banks in the country is also no exception to this fast-catching trend.

For the bank with an asset base as large as Rs1.89 lakh crore, gold loans continued their impressive run with a growth of 54.02 per cent during the past one year reaching Rs12,691 crore as on September 30, 2020 whereas the retail advances grew by only 13.30 per cent to reach Rs39,649.20 crore.

Still it’s just 10.2 per cent of total loan, but Shyam Srinivasan (1st from top), the MD and CEO of the bank, said Federal Bank is keen to raise the gold loan book size up to 15 per cent of total loans, which is a lot in absolute terms.

SIB still remains a small player

For South Indian Bank (SIB), gold loans form only 3.17 per cent of  total loans of the bank as of September 30, 2020, though there are agricultural loans sitting in its books backed by gold as security.

The bank’s new MD and CEO, Murali Ramakrishnan (3rd from top), didn’t make any statements with regard to the prospects of scaling up gold loans, while briefing the analysts on the bank’s Q3 performance recently.

According to experts, SIB will be forced to change its track given the treatment its shares receive from the market. “SIB will have to think seriously of strengthening its bottom line,” they argue.

SIB shares are traded at less than one-fourth of its book value (BV) compared with CSB Bank shares that command 2.17 times the book value in the market, whereas the Federal Bank share too trades low, just above half the book value as of October 27, 2020.

RBI raises LTV to 90 pc for banks

The RBI Governor Shaktikanta Das announced about two months back that banks can lend up to 90 per cent of the value of gold against 75 per cent earlier.

This has further turned the tables against the specialised gold loan companies as this stands to give a much bigger edge for banks in the race to grab market share in gold loan space.

Non-bank gold loan companies have approached the Reserve Bank of India (RBI), seeking to enhance the permissible loan to value (LTV) to 90 per cent of the gold pledged by customers from the existing 75 per cent, as the regulator has done for scheduled commercial banks.


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