Demand for gold loans has surged in the last fiscal year as lenders in general have shown caution in the wake of the Covid-19 pandemic, which has impacted lives and livelihoods. Since traditional sources of finance were blocked, borrowers found it convenient to obtain a loan for their personal and business needs by pawning their gold jewelry.
This was adequately facilitated by the surge in gold prices, especially between April 2020 and August 2020, when gold prices rose by about 25 percent. The Reserve Bank of India (RBI) also cut the loan-to-value (LTV) ratio of these loans (for non-agricultural purposes) from 75% to 90% for banks through March 31st. The peak was in August 2020, and as of March 2021 it was slightly higher than at the beginning of the year. Gold jewelry loans are usually less stringent than other types of loans and are largely based on the valuation of pledged jewelry. The above, along with the countercyclical nature of this asset segment, bodes well for borrowers, especially for subprime segments, whose income levels are more vulnerable to adverse economic cycles.
Bank loan is growing
Bank lending to this segment under the personal loan category grew by about 81 percent during the last fiscal year to 605 billion won in March 2021. Over the past two years, the total volume of bank loans to this segment has grown with compound annual growth. the compound annual growth rate (CAGR) was 56 percent, while the total bank lending and bank personal lending segment grew by 6 percent and 13 percent, respectively.
The country’s largest bank, SBI, has seen a growth of about 465 percent year-on-year in personal loans for gold over the past fiscal year. Banks also provide agricultural loans for gold jewelry to rural borrowers.
The assets of non-bank financial companies (NBFCs) also increased their assets under management (AUM) by about 27 percent, compared with an overall growth of NBFC loans of about 4 percent during the last fiscal year. NBFC’s loan to this segment was around £ 1.1 trillion as of March 2021, compared to an estimated gold collateral of around 350-400 tonnes.
Bank loan grew by about 34 percent year on year in May 2021 and is expected to be moderate compared to last fiscal year, while NBFC loan is expected to grow by about 14-16 percent in the current fiscal year. … According to various estimates, India’s gold reserves are about 25,000 tons, which provides great opportunities for the growth of this segment in the long term.
Product delivery for NBFC is better compared to banks as they offer quick loans with limited documentation. Interest rates offered by the NBFC are higher and range from 12-26 percent (average ~ 20-22 percent) per annum depending on maturity, repayment scheme, etc., while banks charge an interest rate of 8 -10 percent per year. cent per annum. However, the convenience offered by the NBFC and their gold lending subsidiaries helps to shorten turnaround times compared to banks.
In the past, the gold loan business has focused on affiliates and the NBFC has taken initiatives to digitize the process, and some also offer doorstep loans and gold collection services.
The pace of digitization, including online transactions to secure loans and payments, has improved due to the business disruption caused by the pandemic and is currently estimated at 20-25% of the total AUM of NBFC gold credit. Banks, on the other hand, have contacted smaller NBFCs and fintechs to improve their penetration.
Gold price movements are critical and can affect the quality of segment assets; organizations, however, have adapted to this risk, either by reducing the tenure of the loan (3/6/9 months versus the usual 12 months) or by charging interest regularly (monthly or quarterly versus regular payments) while maintaining 12 -month term of office, thereby protecting yourself from any large fluctuations in the price of gold. Typically, loans with a 12 month tenure are repaid in 5-6 months or renewed based on the prevailing gold price.
Looking at trends in gold prices over the past 10 years, the maximum decline in gold prices for the quarter was about 10 percent, while the maximum decline in gold prices was about 15 percent over a six-month period. Lenders generally have the option to require additional collateral if LTV exceeds the statutory 75 percent level and can auction gold jewelry offered as collateral.
In the past (fiscal years 2013–2014), auctions accounted for 21–22% of the initial portfolio of some NBFCs; although there have been cases of incomplete interest reimbursement on non-performing loans, especially on loans issued prior to the introduction of the upper LTV limit by RBI, loan losses at these auctions were very small.
The average annual cost of credit for large NBFCs over the past 10 years has been around 0.4%, and the maximum cost of credit observed during this period was around 1%. The short tenure, small application size, conservative LTV (65-70 percent) and access to collateral make this asset class most suitable for lenders when perceptions of credit risk are unfavorable.
(Posted by Vice President and Head of ICRA Sector)