The Kerala based Federal Bank, which is also a gold financer today said that its gold loan portfolio was safe at the moment. However, further slide in yellow metal prices would call for aggressive intervention and dialogue with clients.
“We are not visualising any significant loss provided, it does not go into a downward spin from here, because the portfolio is calibrated for that kind of a fall so far. As long as it continues to be in and around this price it should be okay,” Shyam Shrinivasan, MD & CEO of Federal Bank told CNBC-TV18.
Gold has shed 21 percent from the record high of 32,464 for 10 grams touched in November spreading panic among investors and gold financers. Although prices slightly recovered today, there are chances of further correction, experts opined.
Shrinivasan explained that the company’s weighted portfolio average Loan-To-Values (LTV) is currently at around 75-78 percent and has deteriorated sharply in last one month.
“The weighted was about 64-65 percent a few months ago, that has come down deteriorated by about 13 percent odd. Another 7-8 percent is where the tolerance would be. Beyond that like I mentioned there has to be much more aggressive interventions and very active conversation,” he stressed.
Shrinivasan is hopeful that Reserve Bank of India would cut rates in the next policy scheduled on May 3.
Below is the verbatim transcript of the interview
Q: What is the current gold loan portfolio for the bank? What could be the impact of this gold price falling? Do you also like the gold Non-Banking Financial Companies (NBFC) fear that some people may default?
A: For now it should be nothing. We are not visualising any significant loss provided, it does not go into a downward spin from here, because the portfolio is calibrated for that kind of a fall so far. As long as it continues to be in and around this price it should be okay.
Q: How are the interest payments being serviced? Do you charge bullet payments or do you make them pay in the form of EMIs? Do you expect any impact on people not repaying because of the bullet payments?
A: Interest is billed every month, collected at the end of the term of the loan. So it depends on the tenure of the loan; whether it is 3 month, 6 month or one year product. The last billing was as of March 31, 2013, where the year ends. We have evaluated the portfolio, for now it does not seem like there is any anxiety on the portfolio at large. A very small component which is an outlier is being addressed by direct contact with customers.
Q: Could you explain that outlier portfolio?
A: The overall weighted portfolio average Loan-To-Values (LTV) are around 75-78 percent after the recent fall in prices. Around 90-95 percent of the portfolio should be sub-Rs 50 crore. We are working with those clients to ensure that they are able to pay and come back and lower their exposure to us.
Q: Are you incrementally lending to build on your gold portfolio or are you looking to scale back?
A: No, at this point in time we have not done any drastic cut in lending. We are continuing to lend. However, the gold price per gram gets calibrated to the market price everyday and the LTV is now around 65-70 percent for new lending.
Q: Like some of the NBFCs you do not expect that you will have to record an interest income reversal because those who were expected to pay do not pay.
A: For now I do not visualize that, because like I mentioned after the rate fall the LTVs are in the mid-80s for some parts of the portfolio. The weighted portfolio is about 75-77 percent. So at this point there should not be any interest reversals or P&L impact. I will caveat this with ‘it should not be another downward spiral of gold prices in which case we have to intervene more aggressively.’
Q: How do you all arrive at the LTV? Do you include making charges, stones? There are as many ways of calculating LTVs as there are NBFCs and banks. How do you calculate LTV?
A: No, not in the bank. The LTVs have not been jacked up by loading in other factors. That was more in the gold loan companies where there were other considerations. We did not do anything like that.
Q: What is the average amount of gold auction that you are expecting this quarter or perhaps in the next two quarters?
A: I can only quote from our more recent experiences. We have an NBFC which does gold loans. They for the last two-three weeks have been working on specific auctions and their realizations have been 98-99 percent. So they have not seen any stress and also typically these auctions happen in a very small market within that catchment. So what happens in one location may not have a significant bearing across every other location. So my sense is the auction should produce anything between 98-99 percent depending on factors regarding the purity of the gold and the issues related to that particular ornament. At this point in time unless there is widespread auctioning across and massive fall then things may change, but our experience more recently suggests that there is no significant issue at this point in time.
Q: How much more of a gold price correction will the bank be able to absorb?
A: I mentioned our weighted LTV right now is between 75-77-78. The weighted was about 64-65 percent a few months ago, that has come down deteriorated by about 13 percent odd. Another 7-8 percent is where the tolerance would be. Beyond that like I mentioned there has to be much more aggressive interventions and very active conversation. We must caution this in the context that at least for banks like us all engagement is with existing customers who have placed their personal jewellery. To that extent there are other factors other than just pricing which starts dictating the relationship. Having said that, as a bank we need to keep a watch on this continuously.
Q: If the RBI cuts rates will you pass it on?
A: I do visualize a rate cut in the forthcoming policy announcement. How much of it will get translate into rate cut both on deposits and lending partly is also competitive. If a bank is raising deposit rates where things are actually looking the other way around then it is more a competitive factor. That said the logical conclusion of a rate cut is that it should be passed through to the end user both on the deposits and on the borrowing side. So my guess is in the coming quarters you will start seeing rates trending down on both advances and liabilities.