Gold loan lenders, both banks and non-banks, have witnessed an increase in the stress levels from the segment in the recent months which the analysts primarily attributed to the resurgence of pandemic and sector specific factors.
Some of the south-based lenders, which are traditionally aggressive in this business, reported a spike in their gold loan NPAs (non-performing assets) in the first quarter of financial year 2021-22. A loan becomes NPA if there is no repayment of interest or principal for a period of 90 days. Banks need to set aside money in the form of provisions to cover losses from such loans.
Bankers and analysts Moneycontrol spoke to said the trend in gold loan slippages shows the stress is primarily due to factors like second COVID-19 wave in April-May, drop in gold prices and certain changes in the loan-to-value ratio rules of gold.
COVID impact
To give an example, Kerala based-Federal Bank’s slippages in Q1 of FY22 rose to Rs 640 crore out of which gold loan slippages were at Rs 50 crore. That apart, another Rs 35 crore slippages were reported from retail borrowers linked to gold loans. The bank also restructured gold loans worth Rs 200 crore.
Shyam Srinivasan, MD & CEO at Federal Bank in the bank’s Q1 earnings call admitted that pain is visible in the gold loan book.
“For the first time in all our life, we saw some slippages or restructuring in gold, but both of which, I believe, is only a matter of time before it cures itself. But prudently we made very significant provisions,” Srinivasan said.
Similarly, another Kerala based-private sector lender, CSB Bank on July 22 reported a rise in bad loans under the gold loan segment. CSB Bank saw slippages worth Rs 435 crore out of which Rs 337 crore were on gold loan accounts.
Announcing the Q1 results, CVR Rajendran, Managing Director & CEO at CSB Bank said. “COVID second wave coupled with the LTV management of gold loans did pose some challenges in the first quarter of FY22. The portfolio LTV that was at 83% has been brought down to 75%,” said Rajendran.
Changes in LTV norms
Under current norms, the LTV ratio is capped by the RBI at 75 percent, while for banks it was increased to 90 percent on August 6, 2020.
LTV is the maximum amount the lender can give to the borrower as a percentage of the value of the asset.
India’s largest gold loan company, Muthoot Finance’s stage III loan assets increased to 1.2 percent in Q1 of FY22 as compared with 0.9 percent in Q4 of FY21; however, it carries excess provision of Rs 295 crore in its balance sheet.
Stage III loans assets are loans where the repayments are overdue beyond 90 days.
Similarly, India’s second largest gold loan NBFC, Manappuram Finance reported on August 11 that it’s gold loan assets under management during the June-ending quarter was down by 6.8 percent to Rs 16,500 crore from Rs 17,700 crore. Manappuram Finance also auctioned high LTV portfolio to de-risk in the last two quarters.
Lenders auction the gold to cover their losses due to movements in the gold prices.
Not a big challenge
Analysts said the jump in gold loan NPAs recently reported by banks and NBFCs is a temporary challenge.
Jinay Gala, Associate Director at India Ratings said, “A 15 percent drop in gold prices impacted banks more than NBFCs, as banks were offering a higher LTV as compared to NBFCs at 75%. Few banks burnt their fingers and heightened auctions happened because of the drop in gold prices.”
“Since banks’ have again moved to 75% LTV the risk has internally moderated on the gold segment. But banks who were aggressive might see some amount of auctioning. NBFCs lending at short tenor of 3 months might face challenges as there is distress at ground level with respect to repayment capabilities,” Gala said.
Analysts said recovery in gold is always good compared with other assets, hence, any major losses are unlikely. There could be some losses on the interest component or overdue interest component but not on the principal, analysts said.
Amit Gupta, VP-Fund Manager, PMS at ICICI Securities said the gold loan NPA problem is a short term challenge for lenders.
“Gold loan NPAs are an issue for one or two quarter as gold prices have come down. As gold prices come down, LTV actually goes above 90-100% where the trouble starts and lenders have to auction it. Lenders are cushioned as it’s a secured loan,” Gupta said.
Also, Gupta expects the gold prices not to fall sharply beyond a point. “Gold loan NPA problem may not remain permanent,” Gupta said.
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