Gold Loans NBFCs: Auctions To Normalise due to Stable Prices, Says Report
Moneylife Digital Team 23 February 2022
The gold loan auctions by non-bank finance companies (NBFCs) rose during the first nine months of FY21-22 (9MFY21-22), perhaps the highest since FY13-14 when gold saw enormous volatility in its prices. NBFCs offering gold loans faced higher auction pressures in 9MFY21-22, mainly due to the COVID-19 impact on borrowers’ cash-flows and gold price correcting by around 10% during the mid-June to 30 September 2021 period, says a research note. 
In the report, India Ratings and Research (Ind-Ra) says, “Auctions by gold loan NBFCs would normalise during the fourth quarter (4Q) of FY22, as gold prices have stabilised after periods of corrections seen since December 2020, along with normalcy returning in business activities.”
However, according to the rating agency, facing intense competition from banks and the absence of any similar spikes in gold prices, NBFCs, especially those with an extensive portfolio, are likely to adopt aggressive strategies to maintain and expand their gold loan franchise.
“Some of the strategies would reflect in compromising on margins while offering lower yield loans, especially large ticket size loans, to retain customers, incurring higher operating expenditure, and probably driving flexible loan terms, thus impacting operating performance. A similar fall was seen in 4QFY21, adding further pressure in 1QFY22,” it added. 
The chart above reflects a sizeable proportion of loans turning delinquent, leading to auctions in the range of 4% to 13% of gold assets under management (AUM) in 9MFY21-22 across lenders with subsequent build-up in gross stage-3 assets. 
Ind-Ra says, “The total stress would be even higher than the summation of these data as not all delinquencies are auctions with some managing to arrange payments. As gold loan borrowers, especially small ticket ones, are generally among the financially weaker segments, the auction data also indicates the high stress among these borrowers largely due to the pandemic. This is corroborated by the high delinquencies observed in microfinance loans in 9MFY22.”
According to the rating agency, the sharp rise in delinquencies and auctions are a reminder that the asset class performance remains vulnerable to sharp volatility in gold loan prices and income volatility among weak borrowers.  
“While NBFCs have seen a sharp rise in loan auctions, the situation at banks has been less intensive as the regulations ensure that the loan-to-value (LTV) ratio remains lower throughout the tenor of the loans, increasing the incentive for borrowers to arrange for the redemption of gold loans from lenders,” it added. 
Ind-Ra notes that the general practice among NBFCs financing gold loans is to limit the LTV ratio at 75% at disbursal and this buffer could reduce on a build-up of interest. However, banks are required to maintain LTV of 75% during the entire tenor of loans. 
As per the respective internal risk policies, NBFCs largely send auction notices to borrowers if the accrued interest plus principal dues lead to a rise in LTV to 90%-95%, thereby necessitating borrowers to either top-up the collateral or close the loan. In case of a shortfall in both the cases, the borrower collateral goes for an auction. 
As gold prices seem to have stabilised and the price holding current levels, Ind-Ra opines that the auctions would stabilise towards a long-term average without sharp corrections. 
“Further, a large portion of auction could mean that some weak borrowers would have filtered out. Also, the high liquidity in collateral and fast liquidation ensure modest loss, given the default for lenders. In most cases, losses are limited to part of the interest, if any. However, the larger implication is on loan portfolio expansion,” the rating agency says. 
Many private and public banks have become fairly active in the gold loan space, enticed by high yield and liquid security. For example, the gold loan portfolio across banks has jumped by more than 89% year-on-year (y-o-y) to Rs607 billion in FY20-21 and Rs709 billion in 9MFY21-22.
These banks have a large distributed presence and have strong pricing power. In addition, since these loans are to be distributed from mostly existing infrastructure, the incremental operating expenditure is moderate. The gold loans across banks, which are classified as agricultural gold loans where there is LTV relaxation available, provide banks with the ability to offer similar terms as that of NBFCs, Ind-Ra points out. 
According to the rating agency, higher competition from banks could result in NBFCs pursuing aggressive strategies to maintain and expand their gold loan franchise. This, it says, could result in an increasing proportion of lower yield loans, especially in higher ticket size loans and expansion in operating costs impacting profitability. Furthermore, there could be a temptation to make loan terms more flexible. 
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