The demand for gold loans surged in the last fiscal as lenders, in general, turned cautious in the wake of Covid-19 pandemic, which impacted lives and livelihoods. With the traditional funding avenues being clogged, borrowers found it convenient to secure credit for their personal and business needs by pledging their gold jewellery.
This was adequately supported by the spike in gold prices, especially between April 2020 and August 2020, when gold prices went up by about 25 per cent. The Reserve Bank of India (RBI) also relaxed the loan-to-value (LTV) of these loans (for non-agricultural purposes) from 75 per cent to 90 per cent for banks till March 31. While the prices came down from the peak witnessed in August 2020 as of March 2021, it was marginally higher than in the beginning of the year. Loans against gold jewellery are typically less rigorous vis-a-vis other types of loans, and are largely based on the assessment of the ornaments being pledged. The above, along with the counter-cyclical nature of this asset segment, bodes well for borrowers, especially for the non-prime borrower segments, whose income levels are more vulnerable to adverse economic cycles.
Bank credit grows
The bank credit to this segment, under the personal credit category, grew at about 81 per cent during the last fiscal to ₹605 billion in March 2021. Over the last two years, the overall bank credit to this segment grew at a compounded annual growth rate (CAGR) of 56 per cent, while overall bank credit and the banking personal credit segment grew at a CAGR of 6 per cent and 13 per cent, respectively.
The country’s largest bank, SBI, saw its personal gold loans grow by about 465 per cent on a year-on-year basis during the last fiscal. Banks also extend agricultural loans against gold jewellery for their rural borrowers.
Non-banking finance companies (NBFCs) also saw their asset under management (AUM) grow by about 27 per cent compared with the overall NBFC credit growth of about 4 per cent during the last fiscal. NBFCs’ credit to this segment stood at about ₹1.1 trillion as of March 2021 against the estimated gold security, weighing about 350-400 tonne.
Bank credit grew by about 34 per cent on a year-on-year basis in May 2021 and is expected to be moderate vis a vis the last fiscal, while NBFC credit is expected to grow at about 14-16 per cent in the current fiscal. Various estimates put India’ gold holdings at about 25,000 tonnes, which provides a large scope for this segment to grow going forward in the long term.
Limited documentation
Product delivery for the NBFCs is better vis a vis banks, as they offer quick loans with limited documentation. The interest rates offered by the NBFCs are higher and in the range of 12-26 per cent (average ~20-22 per cent) per annum depending on the tenor, repayment patterns etc, while banks charge an interest rate of 8-10 per cent per annum. The convenience offered by the NBFCs and their gold-loan focussed branches, however, help in keeping the turnaround time much lower than the banks.
The gold loan business has been branch-centric in the past and NBFCs have been taking initiatives to digitise the process, and some also offer door-step credit and gold collection facilities.
The pace of digitalisation, involving online transactions for securing credit and repayments, improved with the pandemic-induced business disruptions, and is currently estimated at 20-25 per cent of the overall NBFC gold loan AUM. Banks, on the other hand, have tied up with smaller NBFCs and fintechs to improve their penetration.
The gold price movement is a crucial factor and could have an impact on the segmental asset quality; entities, however, have adapted to this risk by either lowering their loan tenure (3/6/9 months vis a vis the typical tenor of 12 months) or by ensuring regular collections of interest (monthly or quarterly vis a vis bullet payments) while maintaining the 12-month tenure, thereby, securing themselves against any large swings in gold prices. Generally, loans with a 12-month tenure get repaid in 5-6 months or get renewed basis the prevailing gold price.
Maximum decline
Looking at the gold prices trends over the last 10 years, the maximum decline witnessed in gold prices in a quarter was about 10 per cent, while it saw a maximum of about 15 per cent decline over a six-month period. Lenders typically have an option to call for additional collateral if the LTVs increase beyond the regulatory stipulated levels of 75 per cent and could auction the gold jewellery offered for security.
Auctions have been as high as 21-22 per cent of the opening portfolio for some NBFCs in the past (FY13-FY14); while there have been instances of under-recovery in the interest accrued on the overdue loans, especially the loans originated before the imposition of LTV cap by the RBI, loan losses in these auctions have been quite negligible.
The average annual credit cost for the large NBFCs, over the last 10 years, is about 0.4 per cent, and maximum credit cost observed during this period was about 1 per cent. Short tenure, small ticket size, conservative LTV (65-70 per cent) and access to collateral make this a go-to asset class for lenders when the credit risk perception is unfavourable.
(The writer is Vice-President & Sector Head, ICRA)