expanding gold loan portfolio of banks - effect of consumerism?

 Exponential Growth in Gold Loan Porfolio in Banks: 

Is it desirable? 

COVID and growth in Gold Loans: The gold loan portfolio of commercial banks in India has grown leaps and bounds in the last three years. The origin of this phase of growth can be traced to COVID lock down days. When jobs and livelihood were threatened, gold at home became the easy option for many to pledge with banks/NBFCs and take cash to meet their daily expenses. With services and manufacturing activities shutdown for quite a long period, the banks, which finance with projection on certainty of repayment or for quick recovery in case of default, looked at gold loans as a 'god send gift'. RBI, in its endeavour to sustain the economic activities to prevent recession or rein in of inflation, reduced  and kept repo rate to 4.0% close to two years. It also permitted the banks to finance upto 90% of the value of gold (90% LTV as against 75% earlier) in 2021*. Gold loans became cheaper and maximum amount  can be raised against the security than ever before.  All these contributed to the substantial growth of gold loan portfolio in the banking system.

Growth during 2022-23: As per RBI monthly bulletin, the personal loans against gold jewellery under the retail sector recorded a growth of Rs.14,468 cr. (15%) during the FY 2022-23. In addition to the above, a significant amount of growth in the agriculture sector, which recorded a growth of Rs.2.26 lac cr. for FY 2022-23, came through gold loans extended to agriculturists. The old generation private sector banks' presentation to analysts, reveal that the gold loan portfolio in their books ranges between 10 to 45 percent of their total advances (from a miniscule percentage prior to COVID). The growth in gold loans in public sector banks (PSBs) is also at record levels, with most of them accounted under agriculture segment, thereby helping them to achieve their priority sector targets.

Is the growth desirable to the Society?: When the banks were nationalized in 1969 and 1980, branch expansion of PSBs across the country was the order of the day till early 1990s. Most of the semi-urban and rural branches to-day were born during that period. The argument advocated for nationalization and opening of branches in semi-urban and rural areas, at that time, was that the weaker sections of the society will be taken out of the clutches of money lenders by making credit available to them on easy terms. But this trend has changed now. More number of gold finance companies are coming up everywhere. Today, when I was passing through a street in Coimbatore, I saw a gold finance company right above a PSB.

Below its name the activities mentioned are: 

"We buy your Gold, Cash for Gold, We release your pledged Gold"

Whether the more than 20% growth in gold loan portfolio of the banks and NBFCs, year after year, has created an opportunity for money lenders to come back in a big way (instead of pawn shop, the name is gold finance company) ? 

While consumerism may be attributed as the reason for the growth in secured gold loans and the exponential growth in unsecured portfolios like credit cards, micro finance and unsecured personal loans, the banker of the day is also to be blamed, as apparently not much of concentration is paid on developing the credit skills in the lower and middle levels, who are aided by scoring sheets and models (which assumes the past income to continue in the present and future) in sanctioning loans. Is it not in order for the banks, which are well equipped in appraising and sanctioning loans to industries, services (excluding NBFCs) and agriculture even now, turn their attention towards those sectors once again in a big way? Catering to the  capex and working capital needs of the productivity linked and employment generating sectors like agri, MSMEs adequately will help to sustain the net profit and interest income, now earned through consumer oriented gold loans, credit cards and other unsecured loans, in the long term. The bank branches and the staff working there have to be fine tuned for such type of advances also. Of course, while doing so, they can still target a decent growth under gold loan portfolio, which is secured, recoverable without legal intervention and helps in CAR as they are eligible financial collateral attracting  no capital charge (if the LTV is less than 85%)

Regards

V.Viswanathan

27th May 2023.

*RBI has since brought the LTV to 75% for banks bringing them on par with NBFCs.