Budget 2022: Gold loan NBFCs require adequate policy support for growth

Despite the recent rapid increase of infections because of Omicron, the economy is on the road to recovery due to positive sentiment and bank credit growth. 

In fact, the RBI January 2022 monthly bulletin presents a holistic scenario with this observation, "Bank credit growth is indicating signs of a gradual recovery, led by the retail segment, although flow of credit to lower-rated corporates remains hesitant." 

However, that finding puts the focus on the role NBFCs have been playing and the challenges they have been facing in fulfilling credit requirements for MSMEs, small businesses as well as individuals. 

Also Read: Indel Money, IndusInd enter India's first gold loan co-lending partnership

Among these NBFCs, specialised gold loan NBFCs have been efficiently serving the cash and liquidity requirements of the people from urban, semi-urban and rural areas. 

For banks, gold loan remains a tool to meet their Priority Sector Lending (PSL) requirements. However, with a growing presence, quicker loan processing capabilities, gold loan schemes of varied tenures, doorstep availability of gold loans, digitally-enabled solutions, etc. gold loan NBFCs have developed a robust market presence. 

For various under-served market segments, gold loans from organised players epitomise the message of inclusive growth. 

According to an estimate, the organised gold loan is currently valued at Rs 4,149 billion and is expected to grow at a 3-year CAGR of 19.5% to reach Rs 7,557 billion by FY2024.  

As there is unfulfilled demand for gold loans in the market, the upcoming Union Budget 2022-23 needs to propose measures to create an enabling eco-system for the gold loan NBFCs so that they are able to expand their reach, enhance service capabilities and innovate solutions to meet the demand.  
 
The sustainability and growth of gold loan NBFCs depend majorly on the ability to access diversified low-cost funding sources. 

The budget needs to propose measures to ensure adequate liquidity infusion to the organised gold loan segment so that it can continue to meet the credit requirements of individuals and the working capital requirements of entrepreneurs.  

To put it in another way, the government needs to assure the gold loan NBFCs of the availability of credit so that they can focus on growth.  
 
As per section 17 of the CGST Act, NBFC can claim Input Tax Credit on its inputs, inputs services or capital goods at a fixed rate of 50% on all of its credit. The rate can be increased to at least 75% which in turn will bring down the cost of lending. 

Also Read: RBI allows jewellers to repay part of gold loan with physical gold
 
Section 194N for tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore has created liquidity issues for smaller retail NBFCs. Therefore, NBFCs below a certain threshold can be exempted from this section.   
 
Going forward, the gold loan NBFCs will intensify efforts to enhance market outreach and market penetration by strengthening online gold loan service capabilities. 

Offering gold loans at the doorstep of the customer and instant gold loans require a strong digital backbone. For that, they need to invest in acquiring digital assets, building IT infrastructure and initiating skill development of the human capital. 

To help gold loan NBFCs expand their service network digitally, the upcoming budget should propose incentives or capital subsidies for investing in digital solutions.  
 
Gold loans which are predominantly of small ticket sizes can be given a PSL tag to enhance credit availability. Moreover, the budget can propose measures to bring the agriculture gold loans provided by NBFCs under the interest subvention scheme with proper checks and audits. 
 
Co-lending partnership between banks and gold loan companies is also presenting opportunities to make gold loans accessible to a bigger and diverse segment of borrowers. 

The aim is to serve the underserved segments of borrowers by leveraging each other's strengths. The government needs to offer the required policy support to boost such collaborations.  
 
The government is definitely aware of the role gold loan NBFCs have been playing in facilitating financial inclusion by making credit accessible and immediately available to the people. The upcoming budget should acknowledge their role and motivate them by proposing growth-focussed measures.   
 
(The author Executive Director & CEO, Indel Money.)