In the fiscal year 2021, non-banking financial companies (NBFCs) saw a significant decline in their market share in the gold loan segment, losing almost 10% to banks. However, in FY22, NBFCs managed to regain a small portion of their lost market share.
Leading gold loan providers like Muthoot Finance and Manappuram Finance believe that there is still ample room for both banks and NBFCs to expand in this market due to its size. However, their strategies to compete may differ significantly.
Muthoot Finance places a strong emphasis on providing high-quality customer service as the key to retaining its customers, according to its Managing Director, George A. Muthoot. On the other hand, VP Nandakumar, MD & CEO of Manappuram Finance, believes that since many parts of the country are still underserved by banking services, both banks and NBFCs have opportunities to expand into untapped regions.
Manappuram Finance, with around 5,200 branches, plans to increase its network to consolidate its market position in existing locations. Meanwhile, Muthoot Finance, which has a strong presence in rural and semi-urban areas, has already opened 100 branches out of the 150 branches approved by the Reserve Bank of India (RBI) in July.
While the unorganized sector holds a larger share of 65% in the gold loan segment, organized players, including banks and NBFCs, represent the remaining 35%, according to a 2020 report by KPMG.
In a recent report, the RBI mentioned that NBFCs face tough competition from banks, especially in the vehicle and gold loan segments, which are typically considered core areas for shadow banks. Banks had gained some market share from NBFCs in the past couple of years, increasing their share to nearly 40% in FY21 from 31% in the previous year. However, due to certain relaxations provided by the central bank regarding loan-to-value (LTV) ratios, non-bank lenders managed to regain some market share from banks by FY22, as indicated by the RBI report.
Apart from banks, other NBFCs like IIFL Finance and Shriram Finance are also expanding their presence in the gold loan business. Shriram Finance is particularly focused on growing its gold loan segment and is in the process of establishing the necessary infrastructure at some of its existing branches over the next 12 to 18 months, according to YS Chakravarti, MD & CEO.
However, entering and building a gold loan vertical in this niche segment requires time and expertise in understanding customer needs, having well-trained staff, monitoring gold price fluctuations, and assessing income stress levels. Established players have an advantage in these aspects, as Nandakumar pointed out.
“Established financial entities often enjoy more trust among customers due to their strong brand reputation, proven track record, security measures, and fraud protection. This perception gives us an edge in the market,” added Muthoot.
Both Muthoot Finance and Manappuram Finance are also diversifying into non-gold segments while maintaining their focus on the gold loan segment. Manappuram Finance, with consolidated assets under management (AUM) of ₹30,665 crore, aims to increase its non-gold portfolio to 50% from the current 37% of the total book. Their non-gold portfolio includes vehicle, MSME, and micro-finance loans. In contrast, Muthoot Finance, with AUM of ₹64,356 crore, has allocated 11% of its total book to the non-gold loan portfolio.