Gold lending NPAs won’t affect lenders: experts
Lower gold prices are unlikely to have a significant impact on non-banking financial corporations (NBFCs) and non-performing assets in gold loans will not be a pain point, experts observed.
Globally, gold prices fell for a fourth straight session on Friday as expectations of an interest rate hike by the U.S. Federal Reserve next week boosted the dollar, data showed. reports.
There could be some impact on the loan-to-value (LTV) ratio for lenders, but Manappuram Finance does not expect any negative effect as asset quality remains strong, said Managing Vice President and CEO Nandakumar.
“Since the dollar has strengthened, there has been a fall in international gold prices. Domestically too, prices have plateaued to some extent as the rupiah has more or less stabilised. Fluctuations in gold prices are not an unexpected phenomenon and depend on a multitude of factors. However, the drop we are currently seeing is temporary as in the long run the demand for the yellow metal is only expected to increase as Indians’ psychological affinity towards gold never wanes,” he added.
“Since there is a direct correlation between the price of gold and the LTV of gold loans, any decline in gold prices would automatically reduce the LTV. However, the value per gram is valued at the market price on based on the average price of the last 30 days, so there would be no major fluctuations in LTV on a daily basis,” said Sanchay Sinha, Country Head of Liabilities at South Indian Bank.
The LTV is the ratio of the loan amount to the gold pledged, which is capped at 75% by the Reserve Bank of India. If the LTV exceeds 90%, lenders will give borrowers time to repay. In the event that the latter are unable to repay the loans, the lenders organize auctions and give the notices. Mannappuram Finance’s LTV was 62% in the first quarter of the current fiscal year while that of Muthoot Finance was 68%.
At this point, as even with the current drop in gold prices, NBFC’s LTV has not yet reached the 90% threshold, which is not of concern, Krishnan Sitaraman, Senior Director and Deputy Director of ratings from CRISIL Ratings, said. In the event of a huge gold price move, which is very unlikely at the moment, shadow banks can initiate an auction process and recover the loan amount.
Previously, banks received a waiver from the RBI to carry up to 90% LTV for gold lending, which expired on March 31, 2022.
This was a challenge for banks in the first quarter of FY23 as they had to recover these loan amounts in a short period of time, said Pralay Mondal, Managing Director and CEO of CSB Bank. However, NPAs in gold lending are not a problem for banks, he said.
Domestically, gold prices are likely to trade with a negative bias in the coming sessions due to rising US bond yields, analysts said. Although the price direction of gold loans is unclear, due to the pattern of movements in the dollar, it will not impact the demand for gold loans, he said, because borrowers generally opt for gold loans as a last resort.
“Whether prices go up or down, the requirement will not change. Thus, the limited movement in gold prices should not affect the demand for gold loans,” Sitaraman said.