Aggressive lending against gold by the banks in the pandemic induced tighter liquidity situation last year, at the instruction of the Reserve Bank of India (RBI) may prove dearer to them. The banks are finding themselves in a tight spot as the prices of gold, which they have taken as collateral for disbursing the loan, has fallen by over 20 percent from its August 2020 peak of Rs 57,100 to the current level of Rs 46,700. Against this, the non-banking finance companies (NBFCs) are in much better shape as they were not as aggressive as banks and the interest rates charged by them for such loans were comfortably higher.

Apart from periodically collecting interest over the past few fiscals, NBFCs have ensured that disbursement loan-to-value (LTV) ratio is maintained below 75 percent. LTV is the percentage of the market value that is given as the loan to the person who keeps gold/jewellery as collateral and agrees to pay the interest against the loan disbursed to him.

For NBFCs, the average portfolio LTV as on December 31, 2020, was ~63-67 percent, while average LTV on incremental disbursements in the October-December 2020 quarter was ~70 percent. The LTV discipline is also evident in interest receivables remaining at just 2-4 percent of the loan book over the past few years.

For banks, however, incremental-disbursement LTV was higher at 78-82 percent because they were more aggressive than NBFCs in lending against gold during the last fiscal. Much of the growth in their book came during the third quarter of last fiscal, when gold prices were soaring.

Since June 2020, loans against gold surged even as lending to other segments was affected by asset-quality concerns. In the 11 months through February 2021, loans against gold grew ~70 per cent for banks to over Rs 56,000 crore. What further contributed to this growth was the LTV relaxation to 90 percent (only for banks) announced by the RBI in August 2020.

Says Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, CRISIL Ratings, “The average LTV of the gold-loan books of banks is estimated at 75-80 percent currently versus ~70 percent before the RBI relaxation. Given that gold prices have dropped 18-20 per cent from their August peaks on an absolute basis, without periodic interest collections, the books of banks may be susceptible to asset-quality issues to some extent. However, with the LTV dispensation period ending in March 2021, incremental lending would have more LTV cushion.”

Disbursement LTV and timely interest collection have a significant bearing on the cushion available with lenders (see the table below) in terms of value of gold given as collateral compared with the loan outstanding. This, in turn, impacts asset quality. Therefore, robust risk management systems and timely auctions are crucial to offset volatility in gold prices and ultimate credit loss, CRISIL said in a note.

Says Ajit Velonie, Director, CRISIL Ratings, “While gross non-performing assets (GNPA) could rise, ultimate credit cost – a more appropriate indicator of asset quality for gold loans – is not expected to. Historically, while GNPAs had risen to as much as 7 percent for NBFCs, credit costs were low at ~10-80 basis points. This underscores sound business acumen and strong track record of timely auctions. For banks, given the sharp growth they have seen, monitoring LTV and staying agile are imperatives to avert potential asset-quality challenges.”