Banks gaining an edge in gold loan rush

Mumbai: Traditional gold loan companies, such as Muthoot Finance and Manappuram Finance, are striving to maintain their market share which appears to be increasingly headed in favour of traditional banks, which have the theoretical advantage of costs due to an established, low-cost deposit base.

Historically, a rise in gold prices led to faster growth in gold loans for these two south-based financiers, but the script appears to be slightly different this time. Hence, investor interest, too, has remained muted.

Gold loans for Muthoot Finance and Manappuram Finance, India's two largest gold financing NBFCs, respectively expanded 5% and contracted 9% year-on-year in the December quarter. By comparison, gold loans for CSB Bank, Canara Bank, SBI, HDFC Bank and Federal Bank, which have a strong presence in the southern markets, climbed in the range of 19-to-54%.


Industry experts told ET that increased focus, faster turnaround time and better loan rates appear to have tilted the scales in favour of the traditional high-street banks.

Among the lenders, CSB Bank appears best placed and makes for the best bet for those investors buying into the gold-loan theme and benefiting from the current gold cycle.

First, the bank has been aggressively increasing its portfolio of gold loans which expanded by 60% in the December quarter. Second, gold loans are a significant portion of the overall portfolio - 45% as against 20% three years ago.


Higher gold loans have also allowed consistent improvement in the margins and NPAs (non-performing assets). The net interest margin (annualised) for CSB Bank has risen from 5.4% a year ago to 5.8% in the December 2022 quarter and is expected to increase further. Operating profit for the quarter was up 31% year-on-year and net NPA was down to 0.42% from 1.36% a year ago.

On the valuation front, too, the CSB stock appears attractive. It is available 1.6 times its book value and less than 9 times its price to earnings.