Money & Banking

Gold-loan NBFCs will see up to 18% growth in AUM in FY21

Our Bureau. Mumbai | Updated on October 28, 2020

Gold loan non-banking finance companies (NBFCs) will see a 15-18 per cent growth in assets under management in fiscal 2021 as demand for gold loans would rise with the Covid-19 pandemic-driven lockdowns being lifted slowly and economic activity clawing back, according to Crisil Ratings.

Demand for gold loans would rise, especially from individuals meeting urgent personal requirements and from micro enterprises for working capital to restart businesses, the credit rating agency said.

Crisil observed that gold loans would be preferred also because 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.

Gold loan frowth was flat in the first quarter of this fiscal for NBFCs because of low disbursements in April and May due to the country-wide 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 during 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, more than doubled sequentially in the second quarter of this fiscal, he added.

Relaxed LTV for banks

The Reserve Bank of India recently relaxed the loan-to-value (LTV) for gold loans given by banks from 75 per cent to 90 per cent. LTV is the percentage of the pledged gold loan value a lender is willing to give as loan.

The agency observed that while this will benefit banks focussed 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.

For instance, 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, according to the agency.

To provide a smooth repledging process in times of pandemic, larger NBFCs are offering online renewal since the underlying collateral – gold in various forms – is already in their possession, it added.

As per Crisil’s analysis, 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, the agency said.

Timely auctions

According to Crisil, 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 (gross non-performing assets) 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.

The agency underscored that 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.

Crisil expects gold-loan NBFCs to maintain their credit profiles, backed by healthy business growth, strong capitalisation metrics and solid asset quality by maintaining LTV at adequate levels, besides carrying out timely auctions in case of delinquencies.

Published on October 28, 2020

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