With the Covid-19 pandemic-driven lockdowns being lifted slowly and economic activity clawing back, demand for gold loans would rise, especially from individuals and micro enterprises.
With the Covid-19 pandemic-driven lockdowns being lifted slowly and economic activity clawing back, demand for gold loans would rise, especially from individuals meeting urgent personal requirements and from micro enterprises for working capital to restart businesses. Gold loans would be preferred also because non-banking financial companies (NBFCs) and banks have tightened their underwriting norms for other loans, leading to cautious lending to micro and small enterprises, traders and the self-employed, according to CRISIL Ratings.
That, and higher average gold prices on-year mean gold-loan assets under management of NBFCs could grow 15-18% this fiscal. Growth was flat in the first quarter of this fiscal because of low disbursements in April and May due to the country-wide lockdown.
Krishnan Sitaraman, Senior Director, CRISIL Ratings, says, “Unlike other asset classes, gold loan has not faced major issues in collection and disbursement, or re-pledge of loans, barring in the stringent lockdown phase in April and May. With many NBFCs facing collection challenges and a likely increase in delinquencies, fresh disbursements, especially to the MSME and unsecured loan segments, have remained low. Consequently, gold-loan financiers are expected to benefit. Preliminary estimates indicate that gold loan disbursements, including re-pledge, at NBFCs have more than doubled sequentially in the second quarter of this fiscal.”
The RBI recently relaxed the loan-to-value (LTV) for gold loans given by banks. While this will benefit banks focused on gold loans, any substantial weaning away of customers of large gold loan NBFCs will hinge on banks replicating the quick turnaround time, seamless disbursal process and flexible foreclosure options with interest rebate that the NBFCs are known for, and their customers are used to.
For instance, the monthly static pool analysis of CRISIL-rated gold loan NBFCs shows that for a typical 12-month loan product, 60-65% of the loan is foreclosed within the first six months. The short tenure of most gold loans, the partforeclosure option and associated rebates offered by NBFCs make them a convenient choice. To provide a smooth repledging process in times of pandemic, larger NBFCs are offering online renewal since the underlying collateral – gold in various forms – is already in their possession.
From a risk perspective, considering the increase and potential volatility in gold prices, calibrating disbursement LTVs and focusing on timely auctions become the key monitorables. For the June 2020 quarter, average LTV of the top five gold-loan transacting NBFCs was 55-60% versus 60-65% last fiscal, which shows LTVs are calibrated with gold prices. The average LTV for the September 2020 quarter is unlikely to top 65% even if fresh disbursements are at higher LTVs.