Banks and non-banking finance companies are facing an increase in gold loan defaults after the second COVID-19 wave and a 15 percent plunge in prices from last year impaired the repayment ability of borrowers.
To stave off a crisis, big NBFCs are going the extra mile for customers unable to make repayments by giving them more time or offering them new schemes to ease their problems. This has helped them to prevent a rise in defaults.
However, commercial banks are yet to match the level of personalised services that the NBFCs are offering to limit non-performing assets.
“Gold loan NPAs could have gone up 10 to 15 percent from last year,” said GR Jayakrishnan, chief manager of State Bank of India in
Thiruvananthapuram. “We are liberally allowing customers to re-pledge the gold after payment of interest arrears to provide them relief.”
NPAs have worsened in the case of gold loans with overdraft facilities.
“In such cases, the NPAs have doubled. The arrears have increased with the sharp fall in gold prices compared to last year,” Jayakrishnan pointed out.
The price of 22-carat gold peaked at Rs 5,250 per gram in August 2020. In that month, the Reserve Bank of India raised the permissible loan-to-value on gold loans to 90 percent till March 31, 2021, to lessen the hardships of people after the first wave. With job losses and salary cuts, customers made a beeline for gold loans.
NBFCs and banks reaped the benefits as demand for gold loans escalated. The bank interest rate on gold loans was slashed to below 8 percent from about 12 percent.
The major NBFCs recorded an over 25 percent growth in gold loans in FY21. For Muthoot Finance, the biggest gold loan NBFC, loan assets rose 26 percent to Rs 52,622 crore in FY21.
However, with gold prices now hovering at about Rs 4,465 per gram, a 15 percent drop from last year’s peak, and in the aftermath of the second wave of COVID-19, borrowers are struggling to repay gold loans.
“While a section of customers has requested additional time, another set of customers has asked us to auction the gold,” said Josekutty Xavier, director of KLM Axiva Finvest, an NBFC in Kochi.
Since the outbreak of the pandemic last year, more small traders and businessmen took gold loans to fund their operations because other options in the unsecured loan market dried up. Now, with the second wave, they are finding it difficult to repay the loans.
To help them, Muthoot Fincorp, a major gold loan NBFC, has come up with a scheme allowing customers to renew loans at a lower interest rate.
“They get additional funds at a rate of 11.99 percent for six months after the payment of interest arrears. They may have taken the older loan at a higher rate of interest of 15 percent to 19 percent. There is tremendous response to the scheme as it brings down their overall interest rates,” said Thomas John Muthoot, MD of Muthoot Fincorp.
he company has been able to keep defaults at 0.89 percent.
“In the matter of dealing with defaults, there is no hard and fast rule and we try to accommodate their requests for postponing payments,” he said.
Normally, NBFCs give 90 days after the repayment period to clear dues and start the auction process after that. In these pandemic times, however, they are trying to delay the auctions.
“We are encouraging digital payments and we regularly interact with the customers. We heed to their requests for more time for payment and even postpone auctions for their benefit. Consequently, we have been able to keep overdue loans to below 1 percent,” said KR Bijimon, chief general manager of Muthoot Finance.
The NBFCs are optimistic and expect 15 percent growth this year.