Disbursements by gold-loan NBFCs poised for a reasonable growth this fiscal

Non-banking financial companies (NBFCs), which are focusing on gold loans, are expected to see reasonable growth in disbursements this fiscal as demand for credit remains strong. Their growth in the recent past has been underpinned by operational resilience, agility and adaptability to evolving regulations. A key regulatory development this fiscal was the advisory issued in May that curbed cash disbursements. That's what a recent study by CRISIL Ratings analysis of gold-loan NBFCs, which accounted for over 90 per cent of the industry assets under management (AUM), suggested. One has to keep in mind that growth for gold-loan NBFCs has also been supported by favourable movement in gold prices. Moreover, given their robust risk management practices, these NBFCs are well placed to withstand adverse gold price fluctuations as seen in the past few weeks. Interestingly, early evidence of growth momentum is seen in the disbursements for June, which were close to 12 per cent higher than the average monthly disbursements in the preceding quarter. Excluding one large player, the growth was even higher at nearly 23 per cent.

It is also pertinent here to mention that the May advisory from the Reserve Bank of India (RBI) to a few gold-loan NBFCs had recommended strict adherence to the provisions of the Income Tax Act. That meant loans cannot be disbursed in cash in excess of Rs. 20,000. Anything beyond that amount has to be disbursed through the banking channels such as the National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS) or the Unified Payments Interface (UPI).

And following the RBI directive, CRISIL Ratings, in its credit bulletin dated May 21 had indicated that the shift to digital channels for gold-loan disbursements could impact growth in new disbursements. Previously, up to 95 per cent of gold-loan disbursements by NBFCs were in cash — essentially to provide quick service to borrowers.

Since then, NBFCs have smoothly transitioned to digital channels with only a slight increase in turnaround time, which has helped them maintain their edge over banks.

This has been made possible due to their existing infrastructure and technology, which already supported online disbursements for larger loan amounts, as well as educating borrowers to use the digital modes. Quite significantly, NBFCs have been grappling with gold prices, which have declined after the reduction in customs duty announced in the full Union Budget for this fiscal. Moreover, the declining gold prices have not adversely affected gold-loan NBFCs materially for two reasons. Firstly, their portfolio loan-to-value (LTV) range was low at 60-65 per cent (on mark-to-market basis) as on June 30, which provides adequate cushion to manage unfavourable movement in gold prices. Secondly, such NBFCs have typically focused on periodic interest collection, keeping LTV under check. Experts are of the view that any sharp fall in gold prices and their sustenance at the lower level for long would require a close watching. To mitigate this risk, aside from periodic interest collection, gold-loan NBFCs would need to monitor LTV closely and conduct auctions in a timely manner.