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Gold loan auctions by non-banking finance companies (NBFCs) would normalise in Q4 (January-March) FY22 as NBFCs with a large portfolio are seen adopting aggressive strategies to maintain and expand their gold loan franchise in the face of intense competition from banks, according to India Ratings (Ind-Ra).
The rating agency attributed the expected normalisation to gold prices stabilising since October 2021, after periods of corrections seen since December 2020, along with normalcy returning in business activities.
Ind-Ra assessed that as NBFCs may expand their gold loan franchise, this could result 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.
Jinay Gala, Associate Director, Ind-Ra, in a report, observed that gold loan auctions by NBFCs rose in 9M FY22, perhaps highest since FY14 when gold saw larger volatility in its prices.
Auction pressures
NBFCs offering gold loans faced higher auction pressures in 9M FY22, largely due to the Covid-19 impact on borrowers’ cash flows and the gold price correcting by around 10 per cent during mid-June to September 30, 2021, he said, adding a similar fall was seen in Q4 FY21.
A sizeable proportion of loans turned delinquent, leading to auctions in the range of 4 per cent to 13 per cent of gold assets under management (AUM) in 9M FY22 across lenders with subsequent build-up in gross stage-3 assets, the report said.
“...As gold loan borrowers, especially small-ticket ones, are generally among the financially weaker segments, the auction data also indicates high stress among these borrowers largely due to pandemic,” Gala said.
“This is corroborated by the high delinquencies observed in microfinance loans in 9M FY22. 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,” Gala added.
Regulations control
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.
Ind-Ra noted that the general practice among NBFCs financing gold loans is to limit the LTV ratio at 75 per cent at disbursal and this buffer could reduce on a build-up of interest. However, banks are required to maintain LTV of 75 per cent 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 per cent, thereby necessitating borrowers to either top-up the collateral or close the loan. In case of a shortfall in both cases, the borrower collateral goes for an auction, the agency said.
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