As gold prices crash, market gaze turns to quality of gold loan portfolio

Written by ENS Economic Bureau | New Delhi | Updated: Apr 17 2013, 18:28pm hrs
GoldThe crash in gold prices have triggered a surge in demand for jewellery. (Reuters)
The crash in gold prices have triggered a surge in demand for jewellery, but analysts are concerned that the dip could 'significantly' hit the asset quality of gold loan companies.

Gold prices eased off another Rs 1,160 for 10 grams to hit a 21 month low of Rs 26,040 on Tuesday as international prices remained weak for the metal. The metal is now cheaper by 25 per cent for every 10 grams ie Rs 6,535, compared to the prices of November 2012, when the rates had reached the highest level of Rs 32,975.

The falling prices have increased footfalls at jewellery shops said Bombay Bullion Association ex-president Suresh Hundia who said the upcoming marriage season was a key reason.

State Bank of India chairman Pratip Chaudhuri on Tuesday said the bank does not see any stress on its Rs 35,000 crore portfolio of gold loans but it would revise its loan-to-value (LTV) ratio (the percentage of the value of gold collateral it gives out as loan) from the present 70 per cent.

But a report issued by India Ratings, a Fitch Group company noted that unlike banks, the non-banking gold finance companies could be in trouble. It explained that these companies have used a liberal interpretation of regulatory guidelines from RBI on LTV ratio to move to over to 80 per cent financing against the gold pledged to them.

A report written by Prakash Agarwal, associate director at India Ratings says, The gold loan portfolio of NBFCs is more vulnerable than banks, despite similar LTVs at the time of disbursal. The differential impact is attributed to the higher interest rate charged by NBFCs which reduces margin cushion as well as to the weaker credit profiles of their borrowers resulting in higher delinquencies.

Without naming the entities it says South India-based private sector banks are likely to be impacted more primarily due to the higher proportion of gold loans in their books. Prominent gold loan companies from the South include Muthoot and Manappuram both of whose stock prices have slipped 9.4 per cent and 9.8 per cent on a day when the broader market rose 2.11 per cent.

SBIs Chaudhuri said his bank does not lend against gold as these companies do. Instead his portfolio of Rs 35,000 crore comprises mostly agricultural advances to farmers wherein pledging gold as a security increases the value of the advances they get.

LOSING GLITTER

* Gold is now 25% cheaper than November 2012 prices

* Even as consumers rejoice, the attention is now on banks and gold loan companies whose collateral value would be under stress

* Analysts say that the portfolio of gold NBFCs is vulnerable

* India Ratings says that NBFCs are giving gold loans at 80% LTV