Gold loan NBFCs set to clock 18-20% growth in current fiscal: CRISIL

Gold loan NBFCs set to clock 18-20% growth in current fiscal: CRISIL

Non-bank financial companies (NBFCs) specialising in gold loans could see assets under management (AUM) rise 18-20% to Rs 1.3 lakh crore this fiscal, Ratings said on Tuesday. This would be despite a contraction in the first quarter, when the pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.

“Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings. “We expect the momentum to continue for the rest of this fiscal. Gold loans will continue to be a sought-after asset class, while lenders would remain cautious about growth in many other retail asset classes.”

Demand for gold loans from micro enterprises and individuals – to fund working capital and personal requirements – has increased with the pick-up in economic activity and the onset of the festive season, which coincides with the easing of lockdown restrictions by several states.

From a credit perspective, gold loans are a highly secured and liquid asset class that generates superior returns with minimal credit losses. Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic, the ratings company said.

Historically, gold-loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection and timely auctions of gold.

Maintaining loan-to-value (LTV) discipline adds to the comfort, Crisil said.

But sharp swings in the price of gold impacts both, the portfolio and disbursement as it influences the cushion available with lenders.

Lenders faced this issue last fiscal because gold prices fell sharply between January and March 2021, after the August 2020 peak.

On their part, NBFCs have manoeuvred the situation well. Banks, on the contrary, were less proactive, so have seen a rise in delinquencies and faced challenges in rolling over a part of their portfolio to 75% LTV after the 90% LTV dispensation ended in March 2021. For banks loan against gold jewellery portfolio grew by nearly 80% in fiscal 2021.

“Gold-loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check,” said Ajit Velonie, Director, CRISIL Ratings. “Besides ensuring periodic interest collection, they do not flinch from conducting auctions when required – which rose sharply in March and April 2021 – to avert potential asset-quality challenges.”

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