For NBFCs, loans with a ticket size below Rs 1 lakh constituted over 85 per cent of loan originations by volume in FY23.
With the 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, Crisil said on Wednesday.
According to a report by the ratings agency, 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.
That, and higher average gold prices year-on-year mean gold-loan assets under management of NBFCs could grow 15-18 per cent this fiscal, the report added.
Gold loan was flat in the first quarter of this fiscal because of low disbursements in April and May due to the countrywide lockdown.
Krishnan Sitaraman, Senior Director, CRISIL Ratings, said: “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 Reserve Bank of India recently relaxed the loan-to-value (LTV) for gold loans given by banks. While this is expected to 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.
The monthly static pool analysis of CRISIL-rated gold loan NBFCs shows that for a typical 12-month loan product, 60-65 per cent of the loan is foreclosed within the first six months. The short tenure of most gold loans, the part-foreclosure option and associated rebates offered by NBFCs make them a convenient choice. To provide a smooth re-pledging 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 per cent versus 60-65 per cent last fiscal, which shows LTVs are calibrated with gold prices. The average LTV for the September 2020 quarter is unlikely to top 65 per cent even if fresh disbursements are at higher LTVs.
Over the past few years, NBFCs have been conducting timely auctions linked to LTV and gold price movement to manage delinquencies. Even now, except during the most stringent lockdown in April and May, and localised versions in containment zones, there have been hardly any operational challenges to auctions. But the frequency of auctions has been low because LTVs have been under control.
Ajit Velonie, Director, CRISIL Ratings, said: “NBFCs that don’t get swayed by current demand amid higher gold prices and maintain their LTV discipline would fare better from an asset-quality perspective. The asset quality of gold-loan financiers has been steady with low annualised credit cost hovering around 30-90 basis points for the past several years. Even if GNPAs rise and gold prices fluctuate, the policy of auctioning highly liquid gold collateral in a timely manner will keep a leash on credit cost.”
Large gold-loan financiers have also consistently raised funds, including through bonds, under the targeted long-term repo operations and partial credit guarantee schemes at a competitive cost. Consequently, their liquidity profile is adequate with sufficient surpluses to cover debt obligations and operating expenditure, along with positive near-term gaps in their asset-liability maturity profile.