Profitability of gold-loan NBFCs to remain healthy at 4.25-4.5 pc next fiscal: Report

New Delhi, Mar 2 (PTI) Non-banking financial companies (NBFCs) specialising in gold loans are expected to see healthy profitability rising in the medium term with average return on managed assets (RoMA) estimated in the range of 4.25-4.5 per cent next fiscal, a report said.

The rise in profitability will be supported by strong demand, improving operating leverage and low credit losses even as competition from banks and other NBFCs increases, Crisil said in a report.

Strong demand prospects and continued low level of credit losses have enhanced the attractiveness of the gold-loan business, drawing increased competition from banks and diversified NBFCs, it said.

Assets under management (AUM) of gold-loan NBFCs are expected to grow at an annualised rate of 40 per cent between this fiscal and next, significantly outpacing branch additions.

In the first nine months of this fiscal, branch productivity rose 30 per cent for these entities, it said.

For large gold-loan NBFCs, it said, average AUM per branch shot up to Rs 21 crore, while for mid-sized counterparts it rose to Rs 11.5 crore.

A large part of the growth this fiscal is attributable to a sharp increase in the gold prices over the past one year.

Further, a shift in demand away from unsecured credit to gold loans and recent regulatory developments affording higher loan-to-value norms and flexibility on branch network expansion will further support growth prospects, it said.

"Larger gold-loan NBFCs are better positioned to capitalise on operating leverage, aided by strong franchise strength, higher business volume per branch and continued investments in technology and centralised operations. Their scale enables more efficient absorption of fixed costs," it said.

On the other hand, it said, mid-sized gold-loan NBFCs, many of which have been increasing branches to capture incremental demand, may continue to have relatively elevated operating expenses in the near term.

That said, as branch networks scale up and productivity improves backed by strong credit demand, operating leverage is expected to improve further for mid-sized NBFCs, it said.

Besides, these entities continue to focus on Tier 2 and 3 markets, where they have an established presence and where competition from banks and large, diversified NBFCs is lesser, it added. PTI DP DRR