Gold Loan Growth Skyrockets 83%, Outstripping Core Retail Credit
Gold loan growth in India's banking sector hit 83% YoY in October, far outpacing core retail credit. Discover the key drivers of bank credit expansion.
The Indian banking sector has witnessed a massive surge in gold loan growth, which climbed by a staggering 83 per cent year-on-year in October. According to a recent report by Dolat Capital, this growth has significantly outpaced core retail credit, establishing gold loans as a primary engine for credit expansion within the banking system.
A Dominant Driver of Credit Expansion
While the report notes that gold loan disbursements have seen some moderation on a month-on-month basis, the annual trajectory remains exceptionally strong. This trend highlights a growing reliance on gold as collateral for securing credit.
Looking at the broader picture, the overall credit growth in the banking system stood at 18.2 per cent year-on-year for October. While gold loans are stealing the spotlight, other sectors are also contributing to this expansion, including lending to corporates, small and medium enterprises (SMEs), and non-banking financial companies (NBFCs).
Industrial Sector Performance
The appetite for credit isn't limited to retail borrowers. Several industrial sectors have shown robust growth in their borrowing patterns:
- Engineering: Led the pack with a 36 per cent year-on-year increase.
- Chemicals: Recorded a growth of 26 per cent.
- Power: Saw a rise of 23 per cent.
- Metals: Grew by 19 per cent.
The report suggests that corporate borrowers may lean more heavily on bank loans due to high volatility in bond yields, a trend likely to persist until market conditions stabilize.
The Credit-Deposit Tightrope
One of the critical observations in the Dolat Capital report is the widening gap between credit and deposit growth. As of October, credit growth (18.2 per cent) continued to outpace deposit growth, which stood at 16.7 per cent (as of October 15).
This imbalance has pushed the banking system's credit-deposit ratio to 81.6 per cent, with the incremental 12-month credit-to-deposit ratio reaching approximately 88 per cent.
The Role of FCNR Deposits
Despite the gap, Foreign Currency Non-Resident (FCNR) deposits have provided a much-needed cushion. These deposits contributed roughly 450 basis points to deposit flows, effectively narrowing the gap between credit and deposit growth to 150 basis points.
Experts expect this gap to shrink further, given the high loan base anticipated in the second half of the financial year. By FY28, banks are expected to maintain sufficient liquidity headroom to support credit growth that is roughly 200 basis points higher than deposit growth, supported by steady deposit supply and healthy Liquidity Coverage Ratio (LCR) levels.
Public vs. Private Banks: The Interest Rate Divide
The report also sheds light on how different types of banks handle interest rate transmissions. While both public and private sector banks are expected to be similar in passing on repo rate changes for repo-linked loans, a divergence exists regarding Marginal Cost of Funds Based Lending Rate (MCLR).
Public sector banks are projected to take longer and pass on a smaller proportion of rate changes through their MCLR rates compared to their private sector counterparts.