Gold is considered a safe haven investment and it is often used as collateral for loans as it can be easily liquidated in times of financial crisis. The price of gold has been on the rise in recent times, and this bodes well for gold financiers.

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Prices went past $2,000 an ounce during Monday’s session, while domestic prices have reached a record high to trade above Rs 60,000 per 10 gram.

In fact, noting that gold prices are hitting historic peaks, George Alexander Muthoot, Managing Director of Muthoot Finance on March 21 told CNBC-TV18 that he expects prices to go up to $2,150/oz.

"If the problem in the financial sector or the banking sector in the West persist, it can still go up...when gold prices go up, the gold loan demand also goes up, yes – that is correct. It is not relative or exactly proportional to the gold price. It is that when gold price goes up, more people realise that the gold ornaments which they have are more valuable," he explained.

Gold financiers like Muthoot Finance and Manappuram Finance are institutions that specialise in providing loans against gold. For Manappuram Finance, gold loan portfolio forms 58.4 percent of total business while for Muthoot Finance, 98.4 percent of entire portfolio comprises of gold loans.

With the increase in gold prices, people tend to pledge more gold as collateral for loans. This means that the ticket size of loans increases, leading to loan growth for gold financiers. The incremental ticket size is beneficial for both the borrower and the lender. The borrower can get more money by pledging the same amount of gold, while the lender can increase the loan portfolio.

However, a catch to this is that if the loan to value ratio (LTV) on a customer is low, then the rise in gold prices could mean some leeway for lenders to lend more to the same customer. This means that the same customer can get additional loans without any governance issues, which can further aid loan growth for gold financiers.

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The co-relation between gold prices and the balance sheet growth of gold financiers is historically high. This means that when gold prices rise, the balance sheet of gold financiers also grows. This is because an increase in gold prices leads to more people pledging gold as collateral for loans, which in turn leads to more loan growth for gold financiers.

Rise in gold prices can also have a positive impact on the profitability of gold financiers. This is because the interest rates charged on gold loans are typically higher than those charged on other forms of loans. This means that with the increase in loan growth, the profitability of gold financiers can also increase.

Increase in gold prices leads to a surge loan growth as the incremental ticket size increases. However, gold financiers need to be cautious about the LTV ratio of customers and ensure that they do not lend more than what is prudent. Nonetheless, the rise in gold prices is a positive trend for the gold financing industry.

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First Published:Mar 21, 2023 6:50 AM IST