According to Jefferies, gold non-banking financial companies (NBFCs) are poised to benefit from potential interest rate cuts and a surge in gold prices.

New Delhi [India], October 19 : Jefferies has reported that non-banking financial companies (NBFCs) focusing on gold loans are well-positioned to benefit from rising gold prices and potential interest rate cuts in the near future. The report highlights that the increase in gold prices, driven by the U.S. Federal Reserve's decision to cut rates and escalating geopolitical tensions, will enhance the demand for gold loans.

Global gold prices are anticipated to average $2,700 per ounce in the first half of 2025, suggesting a favorable outlook for gold loan NBFCs as market conditions strengthen. With global gold prices having soared by 13% since June, reaching a record high of $2,670 per ounce, companies like Muthoot Finance and Manappuram Finance are expected to experience accelerated loan growth and improved profitability in the upcoming quarters.

Although domestic gold prices have increased by 20% year-to-date, they have slightly lagged behind global prices due to a recent 10% cut in import duties. Nevertheless, domestic prices have still risen by 6% since the end of June. According to the report, gold loan growth at major gold NBFCs is projected to pick up in the third quarter.

Additionally, gold NBFCs stand to gain from potential interest rate cuts, as 31-46% of their liabilities mature within six months. Any reduction in short-term rates is likely to alleviate pressure on net interest margins (NIM) and enhance profitability.

Despite facing some near-term challenges, including directives from the Reserve Bank of India (RBI), traditional gold loan NBFCs are well-positioned to take advantage of these favorable conditions. The report indicates that loan losses in the gold NBFC sector remain limited due to the secured nature of their lending, which is backed by gold collateral. Even though gross non-performing asset (GNPA) levels have experienced some fluctuations, loan losses have remained contained.

The positive outlook for both gold prices and interest rate cuts suggests healthy earnings growth and return on equity (RoE) for key players in the sector. Earlier on Friday, RBI Governor Shaktikanta Das remarked that an interest rate cut at this stage would be "premature and very, very risky," indicating that the central bank will closely monitor inflation rates before making any decisions regarding rate cuts.