The Core Report

Good morning, it's Wednesday, the 4th of September and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

The Take: Reading The Right Signs
Auto sales are slowing again, initial estimates for the month of August are telling us.

Domestic car sales saw a decline in August, thanks to lower demand and high levels of inventory with dealers, running over 70 days in many models.

The largest car maker, Maruti Suzuki, has reported a 4% decline year on year in August. That decline figure would have been higher were there not a 6% growth in exports.

Tata Motors also reported a 3% decline in passenger vehicle sales though Mahindra & Mahindra posted a 16% increase, reported Mint.

Auto makers are obviously now pointing to the festive season which has kicked off but it is not clear at this point whether it is hope or reason that is driving the optimism for a pick up in sales.

Which is not to say that sales will not pick up in this festive season, they of course do but by how much is the question and one would obviously contrast the number with last year

Remember, dealers have to clear at least a month’s inventory for the auto industry to reach some stability.

The larger point is the data and our reading of it. I did mention earlier that the buildup in inventory levels for passenger cars had been staring at our face for several months now and the Federation of Automobile Dealers Associations or FADA, who we speak to almost every month, had been consistently pointing to the inventory problem.

We did not and nor did many as I could see, conclude that there was a major demand problem as such.

That in itself is a problem as I see it, which is that we seem to be not interpreting data properly even when it is staring right at us.

There could be many reasons for this, including the possibility that other data sets were sending contrary signals. But I am not sure that has been the case, at least in the recent past.

Both in the case of entry level car models, or affordable housing, both lower segment entry points, demand has been slowing for some time.

On the other hand, relatively premium and thus more expensive brands have been doing well.

I was at a conference in Mumbai the day before, organised by Elara Capital and specifically part of an interesting panel titled Rethinking Brand Modi.

What preceded the panel was an interesting talk by former RBI Deputy Governor Viral Acharya who made a fairly logical point.

Which is that India cannot rely on wealthy individuals to drive growth and expect the overall economy to improve.

His argument is that after Covid10, rural consumption and investments have weakened.

This is a different discussion of course but here is his logic.

A rich person earning an extra Rs 100 will put it in financial assets whereas a poor person will spend that Rs 100 and also boost consumption in the economy.

When the rich keep getting wealthier, they have a savings problem, Mr Acharya said.

Moreover, since funds can’t go out of the country that easily, they chase the limited financial assets within the country.

That obviously explains both the slowing of consumption at the lower end and the expansion of financial assets, including stock markets, at least partially.

This also explains the rush for premiumisation as we have called it in recent years, across products and services as producers and marketers target the more affluent in the hope that they will trade up rather than putting that money in financial assets. Obviously this strategy has worked.

But this also means that the propensity to consume premium products also has to and likely is starting to plateau.

And then it is back to the mass market. So let's see how this festive season works and try to read the data better!

And that brings us to the top stories

Stock Markets rise for the 14th consecutive and record session but barely.

Oil prices have now fallen below $75 a barrel.

Go for Gold, says Goldman, Indian asset managers concur.

Education loans are fastest growing category for NBFCs thanks to spiralling demand for overseas study

How shifting consumer attitudes including youth is boosting the market for gold loans.

Markets & More
The longest rally has paused somewhat though the markets still managed to close in the green for the 14th session in a row.

Rallies like this while gratifying to watch the graph go in a single direction are also worrying because of the fear that markets could fall suddenly and more dramatically than one would have otherwise expected.

That of course can still happen but remember the rise has been very, very steady in the last 13 trading sessions and the 14th one yesterday saw the Nifty50 just about scrape it.

On Monday, the BSE Sensex and Nifty 50 remained flat and range bound as investors turned their attention back to Wall Street and the imminent though not confirmed rate cut.

The BSE Sensex finally closed down 4.40 points at 82,555 while the Nifty50 gained 1.15 points.

The Nifty50 thus maintained its winning streak of closing in the green for the 14th straight session, closing finally at 25,280.

Oil Falls Below $75 A Barrel
Oil prices continue to fall even as Chinese demand concerns weigh on global oil markets.

Global benchmark Brent has now fallen below $75.

A further contraction in factory activity in China and a deepening property crisis are continuing to drag on the country’s economy, threatening growth targets, Bloomberg reported adding that

Oil has wiped out nearly all of this year’s gains over the past couple of months as economic concerns in key consumers — including China and the US — and ample supply weigh on sentiment. The market is also bracing for additional barrels from OPEC.

Go For Gold
Investment bank Goldman Sachs has said that gold has the highest potential for a near-term price hike due to its status as a preferred hedge against risk, while weak demand from China has led to a "more selective, less constructive" view of other commodities.

"Imminent Fed rate cuts are poised to bring Western capital back into the gold market, a component largely absent of the sharp gold rally observed in the last two years," Goldman analysts said on Monday in a note titled 'Go for Gold', reported by Bloomberg.

Gold prices are up around 21 per cent so far this year, hitting a historic high of $2,531.60 per ounce on Aug. 20.

Goldman is predicting gold at $2,700 by early 2025, versus the previous forecast of end-2024, saying the China market is price sensitive.

Lower prices could of course kick up Chinese buying.

Back home, Nilesh Shah, managing director of Kotak Mutual Fund told the Economic Times that people should not expect 20-30% returns from the market as a birthright.

According to him, if one were to look at a 20-year return of the broad market, it is around 13% + while the last four and a half years has been around 21%.

More importantly, going forward, he said he expects returns to moderate.

And thus people or investors should not expect massive returns.

And how does this link with the Goldman’s Go for Gold pitch?

Well, Shah says this is the time when you should be long because rates are going to be cut.

You should be long gold because central banks are buying gold. And you should be neutral weight to equity with some bias towards large caps.

If there is a correction in the market, you can become overweight.

But at this valuation, it does not make sense to be overweight, he says, making a final pitch to invest in systematic investment plans in mutual funds, particularly if you are under invested in your risk profile.

Education Loans for NBFCs Cross Rs 60,000 Crore
Education loans, primarily those to fund courses overseas, will continue to be among the fastest-growing segments for

non-banking financial companies (NBFCs) because of rising demand for higher education, a new report from Crisil Ratings says.

Education loans grew some 80% and 70% in the last two years to close the last financial year at around Rs 43,000 crore and is expected to cross Rs 60,000 crore this year.

Crisil Ratings said this is mostly driven by the number of Indian students studying abroad which is estimated to have doubled in the last five years to around 1.3 million.

Roughly 10% of these are being funded by NBFCs and Crisil Ratings says while there are banks also funding these students, the overall portion of funding is not that much.

So, people are obviously funding through informal financing, self funding or other forms of loans.

The opportunity thus is that education loan companies have significant headroom for growth.

Moreover, the ticket sizes are rising because tuition fees are going up and so is the cost of living, over there.

Interestingly, Crisil says the portfolio performance of these NBFCs have been resilient so far based on strong credit underwriting.

Their 90+days’ past due (dpd), for education loans, was ~0.2% as on March 31, 2024, whereas for private and public sector banks, gross non-performing assets were 2.0% and 3.9%, respectively.

People also prepaid and foreclosed loans at a strong clip, some 35 to 45% of loans get prepaid in their initial moratorium period of around 3 years while the whole loan is repaid in 5-7 years though the contractual period might be higher.

On the other hand, NBFCs are apparently careful about where they lend, for instance a Canada-bound student has less chances of getting a loan, also because Canada itself is cutting back on student inflows.

Market For Loans
To come back to gold, we spoke of rising demand, but the other market that has been growing steadily is the gold loan market which, like education we spoke of earlier, seems quite orderly at least when it comes to borrower behaviour.

All this is of course relative.

A new study by PWC India titled Striking Gold, The Rise of India’s Gold Loan Market says India’s organised gold loan market could double in next five years to Rs 14.19 lakh crore despite expected moderation in growth due to stricter regulations.

So the topline figures are this.

Indian households own some 25,000 tonnes of gold valued at roughly INR 126 lakh crores.

India is the second largest consumer of gold in the world, with 2023 demand at around 747 tonnes, a little lower than the previous year as prices rose.

The larger point is also that gold loans reflect growing financial inclusion and interestingly, young people are also increasingly depositing gold and taking loans.

This can be of course good and not so good news.

I spoke with Jaikrishnan G, Partner, Advisory at PWC India and author of the PWC report and began by asking him what was changing in the gold loan market and what that said about overall consumer borrowing behaviour and trends.

INTERVIEW TRANSCRIPT

Jaikrishnan G: What is happening today in India's gold loan market, it is now evolved a lot from where it started, legacy in the past. This was in a way financial services product. It was considered as a product that belonged to the underprivileged, unbanked and people do not have credit history in the past. From there to today, it has become an acceptable, most leveraged, frequently used lending product, and it is appearing in every financial services place menu card, starting from ICICI, HDFC to all the NBFCs today, trying to reel in their capabilities around going on two reasons to it. One, the amount of gold India has with its domestic market and the possible penetration that the market offers we have still about less than six percentage of the gold available with the customers. That is what we see with all the organised lenders, securities, stock, if you see. So there is a long way to go there. There's potential penetration that is lacked for anyone to capture. The second reason as gold continues to assume the importance from a consumer standpoint as a wealth product, and the lack of willingness for an Indian customer to sell gold, but they do sell it only when they want to pre purchase, otherwise. Liquidation of gold has been done only through pledging in the past, and that that character of gold as a wealth continues to grow weak. Something interesting, which we found, is that this is across the age groups. It is not that it is a phenomena of seniors, and then then the youngsters are not into it. While the gold buying habit has obviously a pattern of youngsters not buying in large quantities, we think that is also because of the increased price in the gold. So the term of age has come down, but still, the amount of money people spend on gold is is only going up. The cleansing habit is across age groups. It is kind of equally divided. So the non willingness to sell what they have inherited and what they have acquired over a period of time, and the availability of formal lending market at affordable cost, that is primarily being driven by NBFCs, who have expanded across nooks and corners of India, and that is causing this adoption of gold and towards the last part of what are we seeing, where it is headed to so there is an increased adoption of digital in this industry, and the risks that typically used to bother lenders In Gold address their ability to build infrastructure to save keep this gold value it rightly and manage the fluctuating prices, and therefore their inability to keep a right and want to market and loan to value ratio from the portfolio. And these are being understood by better data analytics mechanisms in place, and we have now day enabled local mechanics terms, we have current machines in place, a lot of automation, a tech intervening in terms of solving those problems, which used to be a scalable issue in the past. And therefore the business models have changed. And adoption of time is big in the setup. And as we see moving forward, coupled with the dematerialisation of gold as a metal, the initiatives from government of India, either in the form of EGFR, in the form of centralized local facilities, and many other interesting initiatives the government is rolling out to take physical form of gold into a dematerialized form of gold. We see this evolving further, and this is becoming a warfare would a retail lending product, both consumers as well as for lenders.

Govindraj Ethiraj: And would you have a sense on how this compares with other kinds of loan categories? I know it's small, but by any sense of numbers, or-

Jaikrishnan G: in this financial year, FY24 gold is equaled in terms of dispersers. PL, which will be an interesting thing for did not because the conventional return says Personal Loans goes much faster than buying gold, but the number says that gold loan portfolio has matched personal loan portfolio, if you put this together for our lenders and FIFA 24 and in all likelihood, gold on will only take personal loan in The next few years, there is another reason, which is not just the Personal Loan availability and preference to personal loan it there's another reason why personal loans have come regulators that have been very particular in terms of micro loans, and there were some bit of restrictions in terms of how personal loan financiers were operating in that Space, and therefore lesser amount of fund being available for personal loan financiers to do dispersal, whereas in gold, it is directly proportionate to the gold available, and the increasing price of gold really helped to compensate that lost ground on personal loan. So that's a direct comparison, I would say, because we have seen in the past, if peel becomes. Cheaper and more available. It is a direct competition with gold. Gold will go down when you have the same loan at a lower cost without pledging your gold. That's your preference, if the cost of personal loan increases, and then you prefer to put the gold end so that those two run in a competitive manner. The rest of the products are not really comparable. The only other direct relationship that we have seen for gold as a lending product is the MSME induced loan against property and housing loans we have seen a lot of the use cases for gold is when people do big purchases, and big purchases obviously have people end up taking two lawns. One is the allowable gold on allowable housing loan if you're buying a house, and then abortion of the other fund that is needed for you to do Interior, etc. You press the gold and take it so that that's turning out to be the big use case for gold on in larger ticket size. And we've seen that increase in hard ticket size, gold, especially in semi urban area. And when we looked at the end use of most of it is either related to a property purchase or related to a housing investment. And that explains a lot, because you don't want your burden on homeland beyond a point in time, so beyond a point of things. So you you restrict that to a 60-70, percentage of the property's real value, and then you have a lot of other systems attached to it. That's what we see as another direct relationship between gold and other products,

Govindraj Ethiraj: right? But in general, I mean, from my earlier conversations, one is that people who take loans repay it fast, and many of them are small businesses, almost like small proprietorships, running small shops, I'm guessing, is that what your study also shows or-

Jaikrishnan G: there is a composition of small shops, small medium business entrepreneurs who are using it for the working capital assistance they need because of the nets of acquired availability of this and their ability to, when they get access cash and they have their ability to close it and take it, that component is is very much there, but they are not the only customers there. I think would perhaps, in terms of percentage, less than 25 percentage of the SME gold customers who use it for the working capital purposes. There are other use cases where people will buy it for a relatively longer term in this as sort of equipment, or say things like that too.

Govindraj Ethiraj: Got it and last question, Jay, so what are the concerns, and let's say, the threats in this space, as you look ahead,

Jaikrishnan G: There are two major concerns that this the sector leaders have. One, as you would have noticed from our report, substantial component of the industry is being managed by non banking financial companies. Banks have been traditionally not so aggressive in terms of acquiring gold on and hopefully to be seen private banks opening a more towards the gold customers. In the past, it used to be considered more as an agri product. You get a land tax receipt, and then gold is used as additional collateral. It used to get classified under that, and that's how gold were looked at in the past by those banks. But now guys have started opening up having said that even now, lion's share of hyper retail gold on portfolio is sitting with non banking, finance services company, and if you're a non binding finance company focusing on gold, Reserve Bank of India mandates you to, even if you're on goal, takes some rate approvals beyond 1000 branches, when you go beyond 1000 branches, and therefore your internal expansion is always subject to regulatory approvals. And regulator does go through a rigorous process of approving these branches. And therefore the speed at which these players want to grow is obviously not meeting the market demand. That is one challenge. Another aspect is in terms of how the NBA and portfolio quality definitions are applied on gold. The fact is that it is not a bad asset. Just because the customers have not paid quanto install events is is overlooked. It is still defined in the way of personal loan NPA is defined. So therefore the credit cost, when an investor is involved, if it is an all government or scenario, there's no issue, because they know the real cash is going to come in and you're not going to lose the money. But if you're a listed entity, or you're not investor involved entity, there's an issue with respect to you having higher NPA being reported, and you have than the real NPA because of the EMI default TD accounts, and also the borrower based definition of NPA comes in, and that suddenly classifies the lot of gold loans into NPA bucket. Well, actually they are not, because the price your loan to value is still giving you a long bubble, and when you go for option, you will recover all this money. So there's no incentive for the lender to forcefully recover that in any manner whatsoever. But in report, you see this is tanking, which I think would be detrimental from an investor standpoint. And therefore there could be a capital crunch going on NBFCs that's in the way.

Govindraj Ethiraj: Yeah. Right. Thank you so much for joining me.

Jaikrishnan G: Thank you. Thank you. Thank you Govind, good to see you.