Demand for gold loans has surged over the past fiscal year as lenders have generally become cautious in the wake of the Covid-19 pandemic, which has impacted lives and livelihoods. With traditional funding avenues blocked, borrowers have found it convenient to obtain credit for their personal and business needs by pledging their gold jewelry.
This was sufficiently supported by the surge in gold prices, particularly between April 2020 and August 2020, when gold prices rose by around 25%. The Reserve Bank of India (RBI) also relaxed the loan-to-value ratio (LTV) of these loans (for non-farm purposes) from 75% to 90% for banks until March 31. peak observed in August 2020 from March 2021, it was slightly higher than at the beginning of the year. Loans against gold jewelry are generally less stringent than other types of loans and are largely based on the valuation of pledged ornaments. The above, along with the countercyclical nature of this asset segment, bodes well for borrowers, especially for the non-senior borrower segments, whose income levels are more vulnerable to adverse economic cycles.
Bank credit is increasing
Bank lending to this segment, in the personal loans category, increased by around 81% in the last fiscal year to reach 605 billion yen in March 2021. Over the past two years, overall bank lending to this segment increased to compound annual growth. (CAGR) of 56 percent, while the overall bank credit and personal bank credit segment grew at a CAGR of 6 percent and 13 percent, respectively.
The country’s largest bank, SBI, saw its personal gold loans increase by about 465% year-on-year in the last fiscal year. Banks also provide agricultural loans for gold jewelry to their rural borrowers.
Non-bank financial corporations (NBFCs) also saw their assets under management (AUM) increase by around 27% compared to overall NBFC credit growth of around 4% in the last fiscal year. NBFCs credit to this segment was around 1.1 trillion yen in March 2021 against the estimated gold collateral, weighing around 350-400 tons.
Bank credit grew by around 34% year-on-year in May 2021 and is expected to be subdued from last year, while NBFC credit is expected to grow by around 14-16% in the current year. . Various estimates put India’s gold holdings at around 25,000 tonnes, giving this segment ample room for improvement over the long term.
Product delivery for NBFCs is better vis-Ã -vis banks, as they offer quick loans with limited documentation. The interest rates offered by NBFCs are higher and in the range of 12-26 percent (average ~ 20-22 percent) per year depending on the duration, repayment methods, etc., while the banks charge an interest rate of 8-10 percent. hundred per year. The convenience offered by NBFCs and their branches focused on gold lending, however, helps keep turnaround time much lower than banks.
Gold lending business has been branch-centric in the past and NBFCs have taken initiatives to digitize the process, and some also offer home lending and gold collection services.
The pace of digitization, involving online transactions to secure credit and repayments, has improved with the business disruption induced by the pandemic, and is currently estimated at 20-25 percent of the global loan outstanding. NBFC Gold. Banks, meanwhile, have linked up with NBFCs and smaller fintechs to improve their penetration.
The movement of the price of gold is a crucial factor and could have an impact on the quality of segment assets; however, the entities have adapted to this risk either by reducing the duration of their loans (3/6/9 months compared to the typical duration of 12 months) or by ensuring a regular collection of interest (monthly or quarterly compared to the payments in fine) while maintaining the 12-month mandate, thus guarding against any significant variation in gold prices. Typically, 12-month loans are repaid in 5-6 months or are renewed based on the prevailing gold price.
Looking at gold price trends over the past 10 years, the maximum observed decline in gold prices in a quarter was around 10 percent, while it saw a maximum decline of about 15 percent over a six-month period. Lenders usually have the option of asking for additional collateral if LTVs rise beyond regulatory levels of 75 percent and could auction the gold jewelry offered as collateral.
Auctions have reached 21 to 22 percent of the opening portfolio for some NBFCs in the past (FY13-FY14); Although there have been instances of under-collection of accrued interest on delinquent loans, particularly loans issued before the LTV cap was imposed by the RBI, loan losses in these auctions were quite high. negligible fact.
The average annual cost of credit for large NBFCs over the past 10 years is around 0.4 percent, and the maximum cost of credit observed over this period was around 1 percent. The short duration, the small size of the ticket, the conservative LTV (65-70%) and access to guarantees make it an essential asset class for lenders when the perception of credit risk is unfavorable.
(The author is Vice-President and Head of Sector, ICRA)