Summary of this article
Crisil says lenders are protected despite higher gold loan LTV.
Sharp gold price corrections have been relatively rare historically.
Borrowers can access higher loans but repayment remains crucial.
Domestic lenders are well placed to manage risks arising from a potential correction in gold prices despite the recent increase in the regulatory loan-to-value (LTV) limit for gold loans to 85 per cent, according to a Crisil Ratings report titled Gold-Loan Lenders Ringfenced Well From Price Correction Risk.
The report has mentioned that strong risk management practices, such as regular mark-to-market (MTM) valuation of pledged gold, adequate LTV buffers, and timely auction processes, continue to protect the asset quality of gold loan portfolios.
According to Crisil Ratings, these safeguards have helped lenders maintain negligible credit costs in the gold loan segment over the past decade, even during periods of price volatility.
Gold prices have risen sharply since fiscal 2024, but are still susceptible to fluctuations due to global economic and market factors. To assess the potential impact of such corrections, Crisil has analysed daily spot gold price movements over the past 25 years.
Stress Test Findings
The rating agency considered a 90-day rolling window, reflecting the period typically required for lenders to complete recovery and auction procedures after a loan matures.
The analysis showed that the steepest decline in gold prices during any 90-day period was 20 per cent. A correction of more than 10 per cent occurred in only about 2 per cent of the observations.
Crisil also examined repayment behaviour across borrower cohorts, recovery trends among gold loan-focused non-banking financial companies (NBFCs), collection performance of securitised gold loan pools and the effectiveness of auction mechanisms.
Based on the study, the agency has identified three factors that influence credit losses in gold loan portfolios. These include prepayments before loan maturity, LTV levels at disbursement and during periodic monitoring, and the effectiveness of lenders' risk management and auction processes.
What It Means For Borrowers
The report does not evaluate borrower demand or the benefits of increased loan size. The updated structure, however, will allow the eligible borrowers to avail loans for up to 85 per cent of pledged gold, based on the terms and conditions laid out by the lenders and the regulatory guidelines.
Meanwhile, borrowers need to keep in mind that the value of pledged gold is checked by the lender on a regular basis. Lenders could make changes to ensure they are within the prescribed LTV limits if gold prices drop substantially.
It is also important that borrowers pay loans on time; in case of default, lenders can auction the gold pledged to collect outstanding dues.
The report has indicated that lenders do have systems in place to deal with gold price fluctuations, but borrowers must still evaluate their ability to repay before accepting loans that involve higher limits of gold.
