Assets under management (AUM) of non-banking financial companies (NBFCs), which primarily offer loans against gold, are expected to rise 18–20 per cent to ₹1.3 lakh crore this fiscal against ₹1.1 lakh crore in FY21, according to Crisil Ratings.
The credit rating agency said that this growth would be despite a contraction in the first quarter, when pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.
The agency added that demand for gold loans from micro enterprises and individuals — to fund working capital and personal requirements, respectively — has increased with a pick-up in economic activity and the onset of the festive season, which coincides with the easing of lockdown restrictions by several States.
Sought-after asset
Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, said, “Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter. We expect this momentum to continue for the rest of this fiscal.”
He emphasised that gold loans will continue to be a sought-after asset class, while lenders would remain cautious about growth in many other retail asset classes.
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From a credit perspective, gold loans are a highly secured, liquid asset class that generates superior returns with minimal credit losses, the agency said.
Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic.
Risk management
The agency noted that historically, gold-loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection (which keeps the loan-to-value, or LTV, under check) and timely auctions of gold.
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“Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold impacts both, the portfolio and disbursement LTV, as it influences the cushion available with lenders.
“Lenders faced this issue last fiscal because gold prices fell sharply between January and March 2021, after the August 2020 peak,” the agency said.
NBFCs vs banks
On their part, NBFCs have manoeuvred the situation well, Crisil Ratings said, adding that banks, on the contrary, were less proactive and so have seen a rise in delinquencies and faced challenges in rolling over a part of their portfolio to 75 per cent LTV (as per current Reserve Bank of India guidelines) after the 90 per cent LTV dispensation ended in March 31, 2021.
Banks’ loan against gold jewellery portfolio grew by about 80 per cent in FY21.
Ajit Velonie, Director, Crisil Ratings, observed that gold-loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check.
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Besides ensuring periodic interest collection, they do not flinch from conducting auctions when required — which rose sharply in March and April 2021 — to avert potential asset-quality challenges.
Velonie said timely auctions have ensured that credit costs — a more appropriate indicator of asset quality for gold-loans — remained in check at 30 basis points, well within the historical range.
With leverage being low and pre-provision profitability remaining strong, Crisil Ratings expects the overall credit profile of gold-loan NBFCs to remain stable.
