Tag: LTV

Gold loans shine the brightest in banks’ loan portfolio, BFSI News, ET BFSI

Banking & Finance

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Gold loans have emerged as the fastest-growing major loan segment as people have pawned their jewellery and lenders look at avenues of low-risk growth. Outstanding loans against gold jewellery stood at Rs 62,926 crore as on August 27, up 66% on a year-on-year basis, according to the Reserve Bank of India (RBI) data.

Gold loans are often used to finance consumption spending, such as children’s education, weddings, illnesses or to meet household expenses during distress.

Public sector banks have also entered the segment to further grow their retail business. Despite regulatory arbitrage of higher loan-to-value lending in March 2021, banks have continued aggressively disburse gold loans.

Gold loans were up 1% on month in August 2021 as restrictions during COVID-19 eased and economic activities grew.

Loan demand picked up from the beginning of July as COVID-19 cases started declining. Gold loans via non-banking finance companies (NBFCs) had reported higher customer walk-ins.

LTV impact

However, gold loans have grown a mere 3.6% YTD, which is in contrast with the 54% CAGR seen in gold loan growth over the past two years.

RBI had raised the LTV of 90% on gold loans, which allowed banks to lend up to 90% of the value of the collateral.

However, it withdrew special allowance for banks from April 2021, impacting loan growth.

The average ticket size of loans that customers are opting for is Rs 55,000-60,000, which are rising for many lenders, showed growing signs of distress.

Gold loan NBFCs saw higher competition in the gold loan business last fiscal as banks grew their portfolio taking advantage of the special LIV allowance given to them by the RBI.

The expansion

With growth returning, gold financiers are now gearing up to tap the expected surge in gold loans.

Muthoot FinCorp has expanded its physical network by more than 100 new branches, mainly in the north, east and west regions of India, most of which were in rural and semi-urban areas. The NBFC had opened 70 branches in FY20.

Muthoot’s gold asset under management (AUM) grew at a compound annual growth rate of 12% between FY15 and FY20. In FY21, the portfolio grew 27%.

Pune-based Bajaj Finance has increased its gold loan branches from 480 to 700 in the last financial year and plans to add 100 plus branches this fiscal.

Its loan book grew 52% last year to Rs 2,300 crore, while it saw an increase in ticket sizes from Rs 75,000 to Rs 85,000 last year.

Shriram City Union Finance is also looking to ramp up its gold financing business this financial year, changing its strategy of focusing on other loan portfolios.



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Gold loans sparkle again after second COVID-19 wave blip, BFSI News, ET BFSI

Personal Finance

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Gold that lost shine after the Reserve Bank of India took away the loan-to-value (LTV) benefit for banks amid COVID restrictions in the second wave are sparkling again.

Gold loans were up 1% month on month in August 2021 as restrictions during the pandemic eased and economic activities grew.

Loan demand has picked up from the beginning of July as COVID-19 cases started declining. Gold loan non-banking finance companies (NBFCs) had reported higher customer walk-ins.

FILE PHOTO: Gold bars and coins are stacked in the safe deposit boxes room of the Pro Aurum gold house in Munich, Germany, August 14, 2019. REUTERS/Michael Dalder/File Photo

LTV impact

However, gold loans have grown a mere 3.6% year to date, which is in contrast with the 54% CAGR seen in gold loan growths over the past two years. Gold loan portfolios are up 66% year on year in August.

RBI had raised the LTV of 90% on gold loans, which allowed banks to lend up to 90% of the value of the collateral.

However, it withdrew the special allowance for banks from April 2021, impacting loan growth.

The average ticket size of loans that customers are opting for is Rs 55,000-60,000, which are rising for many lenders, showed growing signs of distress.

Gold loan NBFCs saw higher competition in the gold loan business last fiscal as banks grew their portfolio taking advantage of the special LIV allowance given to them by the RBI.

The expansion

With growth returning gold financiers are ow gearing up to tap the expected surge in gold loans.

Muthoot FinCorp has expanded its physical network by more than 100 new branches, mainly in the north, east and west regions of India, most of which were in rural and semi-urban areas. The NBFC had opened 70 branches in FY20.

Muthoot’s gold asset under management (AUM) grew at a compound annual growth rate of 12% between FY15 and FY20. In FY21, the portfolio grew 27%.

Pune-based Bajaj Finance has increased its gold loan branches from 480 to 700 in the last financial year and plans to add 100 plus branches this fiscal.

Its loan book grew 52% last year to Rs 2,300 crore while it saw an increase in ticket sizes from Rs 75,000 to Rs 85,000 last year.

Bengaluru-based Rupeek Fintech Private Ltd’s disbursals grew 2.5 times during the calendar year 2020. It has added its presence in 17 more cities, from 10 at the end of 2019.

Shriram City Union Finance is also looking to ramp up its gold financing business this financial year, changing its strategy of focusing on other loan portfolios.



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Gold loan demand is expected to spike after lockdown: Indel Money CEO

Banking & Finance

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Pledging of household gold is expected to go up across states with the gradual easing of lockdown restrictions, according to Umesh Mohanan, Executive Director and CEO, Indel Money, a Mumbai-based NBFC.

He says that customers are strapped for cash to honour committed outflows. The virus has been deadly this time with rising infection rate, caseloads and number of deaths, forcing people to borrow more. All these have added to the financial woes of the common people, he adds. Edited excerpts of an interview:

What is the outlook on gold loan for the current fiscal? And what will drive the growth of gold loans?

The outlook for gold loan demand is positive and the demand will be fuelled by healthcare requirements, pandemic-driven uncertainty, the limitations of the banking sector to serve gold loan demand at the earlier pace due to decreased gold prices and end of 90 per cent LTV lending on last March 2021, apart from increased credit crunch due to the prevailing policies.

Our gold loan book has registered around 40 per cent growth in FY20-21. We expect around 50 per cent plus growth in FY21-22, thanks to our expanded geographical presence.

Has there been growth in the gold loan business in April and May of FY22 compared to the same period last year?

The branches in locations with reduced restrictions on movements have witnessed larger pent-up demand in comparison to last year. The industry has been growing at over 25 per cent. Gold loan demand is expected to spike after the lockdown and the post-lockdown demand growth is expected to surpass growth registered during the post lockdown period last year.

Also read: Borrowers to get option to repay a part of the Gold (Metal) Loan in physical gold

Recently, gold loan NBFCs auctioned record tonnage of pledged gold through auctions. Does this point to the growing credit risks for firms offering short-term loans?

Truly, at this point when cash flow is constrained for the common consumer, the facility to keep their gold live by remitting interest and continuing at their original LTV would be a better option than the short-term loans. The consumers have to settle interest along with principal within a short period of time, and correspondingly re-pledge at relatively lower LTV. This will result in huge cash outflow for the customer, in comparison with the longer-tenure schemes.

What are your plans for the company?

We are planning to explore various options such as capital injection by the group holding company, raising funds through public NCDs and PE/VC placement for our expansion. We have recently opened 25 branches across Andhra Pradesh and Telangana. We also have plans to enter Maharashtra and Gujarat with our conventional brick-and-mortar format by Q4 FY21-22. We are also planning to set up a support hub in all major cities to spread our doorstep gold loan facility which functions through the network of virtual branches.

We are planning to launch pre-paid cards. Our disbursals are fully automated because of our tie-ups with banks through our app. Existing customers can use our portal or mobile app to extend the exposure of the gold pledged with us on the basis of the prevailing LTV.

We will set up an automated process in which customers can manage the credit line according to their preferences. We are also planning to expand our online gold loan facility to take the branches to the homes of customers as the upper segments of MSMEs are not comfortable visit gold loan company branches during the gold appraisal process.

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CRISIL, BFSI News, ET BFSI

Personal Finance

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Over the last six months, the gold price has corrected 10% on a 30-day rolling basis, although it has dropped double that amount on an absolute basis.

According to CRISIL Ratings, the recent drop in gold prices is unlikely to have a significant effect on the asset quality of non-banking financial companies (NBFCs) that lend against gold. However, Banks that disbursed gold loans aggressively during the previous fiscal year may see an impact on their asset quality.

In addition to receiving interest on a regular basis, NBFCs have ensured that the disbursement loan-to-value (LTV) is held below 75 percent over the past few fiscals. The average portfolio LTV for NBFCs was 63-67 percent as of December 31, 2020, while the average LTV on incremental disbursements in the October-December 2020 quarter was 70 percent. Interest receivables have remained at just 2-4 percent of the loan book over the last few years, demonstrating the LTV discipline.

Banks, on the other hand, had a higher incremental-disbursement LTV of 78-82 percent than NBFCs. Most of their book’s growth occurred in the third quarter of last fiscal year, when gold prices were soaring. In the 11 months through February 2021, Bank loans against gold increased by 70% to over Rs 56,000 crore. Announcement made by Reserve Bank of India (RBI), August 2020 that the LTV limit would be relaxed to 90% (only for banks), contributed to this growth.

Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, CRISIL Ratings, said, “Without periodic interest collections, banks’ books can be vulnerable to asset-quality issues to some degree, given that gold prices have fallen 18-20% from their August peaks on an absolute basis. However, with the LTV dispensation period ending in March 2021, incremental lending would have more LTV cushion.”

Cushion available with lenders in terms of the value of gold provided as collateral relative to the loan outstanding is influenced by LTV and timely interest collection. As a result, reliable risk management systems and timely auctions are critical for mitigating gold price fluctuations and eventual credit loss.

Ajit Velonie, Director, CRISIL Ratings, said, “While gross non-performing assets (GNPA) could rise, ultimate credit cost – a more appropriate indicator of asset quality for gold loans – is not expected to. Although NBFCs’ GNPAs had risen to as high as 7%, credit costs were still low at 10 to 80 basis points. This demonstrates sound business judgement and timely auctions. Given the rapid growth that banks have experienced, tracking LTV, and remaining agile is critical for avoiding possible asset-quality issues.”



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