Gold NBFCs will benefit from potential rate cuts and prices surge: Jefferies

Non-banking financial companies (NBFCs) which focus on gold loans are poised to gain from the dual tailwinds of rising gold prices and potential rate cuts in the near future, Jefferies said in a report.

It added that the rise in gold prices because of the U.S. Fed's rate cut decision and increasing geopolitical tension will drive the demand for gold loans.

As global gold prices are expected to average USD 2,700/oz in the first half of 2025, Jefferies stated that the future looks bright for gold loan NBFCs amid strengthening market conditions.

With global gold prices soaring 13 per cent since June to a record high of USD 2,670/oz, gold NBFCs such as Muthoot Finance and Manappuram Finance are expected to see accelerated loan growth and improved profitability in the coming quarters, the report added.

The domestic gold prices, which have risen 20 per cent year-to-date, have lagged slightly behind global prices due to a recent 10 per cent import duty cut but have still increased 6 per cent since the end of June.

Gold loan growth at the prominent gold NBFC companies is projected to pick up in the third quarter, as per the report.

Moreover, gold NBFCs are well-positioned to benefit from potential interest rate cuts. As 31-46 per cent of their liabilities have maturities under six months, any reduction in short-term rates is expected to ease net interest margin (NIM) pressure and improve profitability.

Despite some near-term headwinds, including the Reserve Bank of India's (RBI) directives, traditional gold loan NBFCs are better placed to capitalise on these favourable conditions.

As per the report, the loan losses in the gold NBFC sector remain limited due to the secured nature of their lending, backed by gold collateral. It further adds that the loan losses were limited even as gross non-performing asset (GNPA) levels experienced some volatility.

The favourable outlook for both gold prices and interest rate cuts suggests healthy earnings growth and return on equity (RoE) for key players in the sector, the report added.

Earlier on Friday, RBI Governor Shaktikanta Das had said that the interest rate cut at this stage will be 'premature, and very, very risky'. He added that the central bank will be watchful on the inflation rate for any decision on rate cut.