Krishnan Sitaraman, Senior Director and Deputy Chief Rating Officer, CRISIL Ratings said, “In the second quarter of this financial year, there has been a sharp jump in gold-loan disbursements after the first quarter. “We expect this momentum to continue for the rest of the current financial year as well,” he said. Gold loans will continue to be an in-demand asset class, while lenders remain vigilant development in many other retail asset classes.”
The demand for gold loans from micro-enterprises and individuals to meet working capital and personal needs has increased with a pick-up in economic activity and the onset of the festive season, coinciding with the easing of lockdown restrictions by several states.
From the credit point of view, gold loan is a highly secured and liquid asset class that gives good returns with minimal credit loss. Therefore, NBFCs that offer them are in a better position than those lending to other retail asset classes, especially in times of asset-quality pressure arising out of the pandemic, the rating company said.
Historically, gold-loaned NBFCs have seen negligible losses due to robust risk management practices such as periodic interest collection and timely auction of gold.
Crisil said maintaining loan-to-value (LTV) discipline brings comfort.
But sharp fluctuations in the price of gold impact both the portfolio and disbursements as it affects the cushion available with the lenders.
Lenders faced this issue in the last financial year as gold prices fell sharply between January and March 2021 after peaking in August 2020.
On their part, the NBFCs have handled the situation well. In contrast, banks were less active, so there have been delays and challenges in rolling out a portion of their portfolio to 75% LTV, after the 90% LTV distribution ended in March 2021. Banks’ credit against gold jewelery portfolio grew by around 80% in FY21.
Ajit Veloni, Director, CRISIL Ratings, said, “Gold-loan NBFCs are quick to calibrate disbursements LTV, while also implementing robust risk management practices to keep portfolio LTV under control. “In addition to ensuring periodic interest collection, they do not shy away from conducting auctions when required – which rose sharply in March and April 2021 – to avoid potential asset-quality challenges.”