The decline in gold prices is not expected to have a significant impact on the non-banking financial companies (NBFCs) and the non-performing assets in gold loans will not be a pain point, experts have observed.
Globally, gold prices fell for a fourth straight session on Friday, as expectations of an interest rate hike by the US Federal Reserve next week boosted the dollar, revealed reports.
There could be some impact on loan-to-value (LTV) for lenders but Manappuram Finance does not foresee any adverse effect because the asset quality remains strong, MD & CEO VP Nandakumar said.
“Since the dollar is strengthening, there is a fall in international gold prices. Domestically also, the prices have plateaued to a certain extent as the rupee has stabilised more or less. Fluctuations in gold prices are not an unexpected phenomenon and are dependent on a host of factors. However, the dip we are seeing now is temporary because over the long term, demand for the yellow metal is only expected to go up as Indians’ psychological affinity towards gold never wanes,” he added.
“Since there is a direct co-relation between the price of gold and LTV of gold loans, any dip in gold prices would automatically reduce the LTV. However, the value per gram is marked-to-market basis the average price over the past 30 days hence there would not be any major LTV fluctuations on a daily basis,” Sanchay Sinha, country head of liabilities at South Indian Bank, said.
The LTV is the ratio of the loan amount to the gold being pledged, which is capped at 75% by the Reserve Bank of India. If LTV crosses 90%, lenders will give time period to borrowers to pay back. In case the latter are not able to repay the loans, lenders conduct auctions and give the notices. The LTV for Mannappuram Finance was at 62% in the first quarter of the current financial year while that for Muthoot Finance was at 68%.
At this stage, as even with the current decline in the gold prices the LTV of NBFCs has not yet touched the 90% threshold level, which is not a cause for concern, Krishnan Sitaraman, senior director and deputy chief ratings officer of CRISIL Ratings, said. In case there is a huge movement in gold prices, which is very unlikely as of now, the shadow banks can initiate auction process and recover the loan amount.
Earlier, banks were given dispensation from the RBI to carry up to 90% LTV for gold loans, which expired on March 31, 2022.
This was a challenge for banks in Q1FY23 as they had to recover those loan amounts in a short span, Pralay Mondal, MD & CEO of CSB Bank, said. However, NPAs in gold loans are not a pain point for banks going ahead, he said.
Domestically, gold prices are expected to trade with a negative bias in coming sessions due to increase in the US bond yields, according to analysts. While there is no clarity on the direction of gold loan prices, owing to the evolving dollar movements, it is not going to impact the demand for gold loans, he said, as typically borrowers go for gold loans as a last resort.
“Whether the prices go up or down, the requirement is not going to change. So, the range-bound movement of gold prices should not affect the demand for gold loans,” Sitaraman said.