Gold loan businesses sparkle in Kerala despite a COVID-battered economy

Kochi: The economic uncertainty in the aftermath of the COVID-19 pandemic has spurred an unusual beneficiary – the gold loan business.

As the lockdown wreaked havoc on the finances of the layman, the gold loan business emerged as an easier mode of access to finance for the needy.

The business of banks and the non-banking finance companies (NBFCs) in the state soared, especially after the first phase of the lockdown.

Initially, it was the pent-up demand generated by salary cuts and job losses that forced more people to go for gold loans.

A gradual uptick n the economy saw the advent of a new class of customers including small traders and the self-employed, who desperately needed money to resume business.

According to V P Nandakumar, MD and CEO of Manappuram Finance, before the pandemic, the monsoon season used to spur demand for gold loan for meeting education and medical expenses. “This year, as the schools are still closed and most medical facilities are operating at lower levels, the incremental demand comes mostly from shopkeepers and small business owners.’’

The gold loan industry estimates a 10-20 % growth in the past few months and the trend may continue or show a further rise in the coming months as industrial activities gain momentum.

“With the declaration of moratorium on payment, the unsecured loan market has dried up, which has led to more dependence on secured loan segments like gold loan. People are using it as capital to re-start businesses,’’ says Thomas John Muthoot, MD of Muthoot Fincorp.

The post-COVID situation is transforming the gold loan market by bringing in new dimensions. Digitalisation seems to be the new mantra and the NBFCS are rising up to the challenge by introducing innovative products.

“From 10% earlier, digitalisation has gone up to 40% in gold loan business in the last few months. This has given us more service bandwidth as we may not have to go for increased staff strength with expansion,’’ says K R Bijimon, chief general manager of Muthoot Finance. The company has launched several new products to cash in on the trend, including a scheme to attract gold kept in bank lockers, for traders and business people.

'The pandemic has in fact accelerated digitization and tech-enabled contact -less delivery model adoption by both the gold loan service providers as well as it's customers. Customers can now avail gold loan from the comforts of their homes. This strategic transformation will redefine and alter the status-quo of gold loan business permanently,' said Mathew Muthoottu, MD, Muthoottu Mini.

In the case of Manappuram Finance, the share of online gold loan has risen to 62 per cent from 45 per cent. The company has extended its doorstep gold loan facility, which was confined to metros before lockdown, to all locations now.

“Typically, our customers have belonged to the lower economic strata. However, post-COVID, we have noticed that our customer profile is shifting with a larger proportion of new customers from the middle and upper-middle classes, mostly salaried employees, working women etc. This is because of the increasing acceptance of online gold loan due to its convenience factor,’’ Nandakumar says.

The banks too are now aggressively promoting gold loans. “We are giving more thrust to the gold loans as demand for other loans has declined with not much activities happening in the economic front. We have cut the interest rate on gold loans to 7.7 per cent from 12 per cent or more earlier,’’ says G R Jayakrishnan, chief manager of SBI, Poojapura.

The organised gold loan sector, including that for agriculture, in the country is around Rs 3 lakh crore. Of this, banks account for around Rs 2 lakh crore. “But if you are looking at commercial gold loans alone then NBFCs and banks may have an equal share of the Rs 2.5 lakh crore pie,’’ observes Bijimon.

NBFCs don’t deal in agriculture gold loans.

Though the interest rates of banks are lower, quicker delivery of loans have given the NBFCs upper hand in the business. The convenience factor has attracted more customers to NBFCs. But the scene is fast changing. “Many banks have appointed dedicated employees to disburse gold loans during the pandemic,’’ Jayakrishnan says.

Earlier, the agriculture gold loans in banks had more takers with money often used for non-farming activities.

The banks have become cautious in issuing agricultural gold loan after the strict instructions from RBI last year to ensure it is used only for agriculture purpose. The non-extension of interest subvention for such loans beyond August 31 is another reason for waning interest in it.

The NBFCs have also relaxed interest rates and they are not insisting on penalty for non-payment. For instance, Muthoot Fincorp has declared unchanged interest for six months in its new product for those seeking loans up to Rs 50,000. Usually the interest changes after 3 months. “We have also allowed loan for customers whose earlier loan is in arrears,’’ says Thomas John Muthoot.

His company has also rolled out another product targeting MSMEs with higher loan off-take.

The surge in the gold price has also benefited the business as the customers are able to secure more amount for gold. Most of the NBFCs are offering, on an average, 75% loan to value (LTV) on gold now. There are reports of the RBI relaxing it to 90 per cent in the wake of COVID pandemic.

“The higher gold price has allowed a section of our customers to draw higher amounts against their pledges of gold jewellery. At the same time, our average LTV at the portfolio level has come down in recent months, as many borrowers also take advantage of higher gold prices by pledging lower-weighted jewellery,’’ says Nandakumar. Usually an uptick in gold loan demand after gold price increase is a short-term phenomenon as higher price becomes the new normal, but this time around the positive impact of the hike appears to be prolonged perhaps due to wider pandemic-related disruptions in the economy, he adds.

(P K Krishnakumar is an independent journalist based in Kochi.)