Gold loans may rise sharply in coming months as banks, NBFCs make norms stricter for other loans

Gold loans may see a significant surge in the coming months as NBFCs and banks have tightened their norms for other loans, leading to cautious lending to MSMEs, traders, and the self-employed. With the Covid-19 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 MSMEs for working capital to restart businesses, said a report by Crisil. The higher average gold prices on-year mean gold-loan assets under management of NBFCs could grow 15-18 per cent this fiscal, the report added.

It is to be noted that the growth was flat in Q1 FY21 due to low disbursements in April and May. However, there have been hardly any operational challenges to auctions. But the frequency of auctions has been low because LTVs have been under control.

“Unlike other asset classes, the 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,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. Gold-loan financiers are expected to benefit and estimates indicate that gold loan disbursements at NBFCs have more than doubled sequentially in the second quarter of this fiscal, he added. 

Crisil expects gold-loan NBFCs to maintain their credit profiles backed by healthy business growth, strong capitalisation metrics, and solid asset quality by maintaining loan-to-value (LTV) at adequate levels besides carrying out timely auctions in case of delinquencies. The Reserve Bank of India had recently relaxed the LTV for gold loans given by banks. 

“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,” said Ajit Velonie, Director, CRISIL Ratings. 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, he added.