Golden Prospects: US Fed Policies and Rising Gold Prices Boost Gold Loan NBFCs

Non-banking financial companies focused on gold loans are well-positioned to benefit from rising gold prices and potential interest rate cuts, according to a Jefferies report. These companies, including Muthoot Finance and Manappuram Finance, are poised for accelerated growth as global gold prices surge and market conditions strengthen.

Non-banking financial companies specializing in gold loans are set to prosper from the favorable conditions of surging gold prices and potential rate cuts, a report by Jefferies has highlighted. The increase in gold prices, driven by the U.S. Fed's rate cut decision and rising geopolitical tensions, is anticipated to fuel demand for gold loans.

Global gold prices are projected to average USD 2,700/oz in early 2025, making the future promising for gold loan-focused NBFCs as market conditions improve. With gold prices climbing 13 percent since June to an unprecedented USD 2,670/oz, companies like Muthoot Finance and Manappuram Finance are expected to experience enhanced loan growth and profitability, the report added.

While domestic gold prices have risen 20 percent year-to-date, they trail global prices due to a recent 10 percent import duty cut but have still advanced 6 percent since late June. As such, gold loan growth at leading NBFCs is forecasted to ascend in the third quarter, according to the report.

Moreover, gold NBFCs stand to gain from potential interest rate reductions. As 31-46 percent of their liabilities mature within six months, cuts in short-term rates could alleviate net interest margin pressure and boost profitability. Despite facing short-term challenges like directives from the Reserve Bank of India, traditional gold loan NBFCs are ideally equipped to leverage these advantageous conditions.

The report indicates that the sector's loan losses remain restricted due to the secured lending backed by gold collateral, even as gross non-performing asset levels fluctuate. The encouraging forecast for gold prices and rate cuts heralds robust earnings growth and return on equity for major industry players, it further stated.

However, RBI Governor Shaktikanta Das cautioned that an interest rate cut at this juncture would be 'premature, and very, very risky,' noting that the central bank remains vigilant regarding inflation before making any rate cut decisions.

(With inputs from agencies.)