Fin stress, lower loan-to-value rule may slow gold loan biz

CHENNAI: On Wednesday evening, after Manappuram Finance said in an investor presentation that it had auctioned gold worth Rs 404 crore during the January-March quarter (Q4FY21), compared to Rs 8 crore during the previous three quarters put together, it raised doubts among lenders if the Covid-induced stress was showing up. Although the jury is still out on this issue, there are signs that gold loans may be losing some shine after the RBI reverted to its pre-Covid loan-to-value (LTV) ratio of 75% from 90% level (which it had announced in August 2020).
RBI data showed that at the end of FY21, total value of gold loans outstanding was nearly Rs 60,500 crore — up 82% on the year. In FY22, this growth rate could slow down substantially, industry players said.
According to the presentation by Manappuram Finance, one of the leaders in the gold loan segment, its standalone gross non-performing assets (GNPAs) and net NPAs were both up by the end of the Q4FY21 at nearly the same levels recorded soon after demonetisation in November 2016. However, it said it has maintained delinquencies with the GNPA at less than 2%.

According to industry experts, the stress in the gold loan segment could be seen in the lower levels of the market and mainly with NBFCs, but not so much in those advanced by banks. “We did not see any sharp increase in the delinquency in our books this quarter compared to previous one. There is a slight increase because last quarter was a moratorium quarter,” said Shripad Jadhav, president & business head of tractor finance, crop finance & gold loans at Kotak Mahindra Bank. “Robust risk practices, good collection processes and profile check during on-boarding help us maintain the quality of the pool and also low delinquency.”
Financial stress is also forcing people to sell gold to realise its full value, rather than pledge the same to get loans that would not be more than 75% of its value. This is after the RBI reverted to 75% of the LTV from 90% earlier. “With the LTV coming back to 75%, there is a drop in demand for gold loans. People are keen to sell gold jewellery to get the full value, as they do not have the repayment capacity if they pledge it. And for existing customers who want to renew their gold loan, we see LTV sliding to 68-70% after deductions,” said IIFL VP Mohan Sharma. The combined impact of stress in the economy at the lower level and the increase in the LTV could lead to slowdown in the gold loan business. A senior official from City Union Bank said that demand for gold loans has been sluggish in the last few months. “Poor people are selling the pledged gold jewellery to pawn brokers and taking back the difference. There is a huge impact on fresh lending, especially with the current lockdown. Customers are not able to redeem the jewellery with lack of income in this lockdown and poor business,” the banker said.

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