Why Lenders Have Stepped Up Auctions Of Gold Jewellery

“Gold auctions have reached their highest level in the last four to five years across all types of lenders, including banks and non-banks,” said CVR Rajendran, managing director and chief executive at Kerala-based CSB Bank Ltd. Agreed Ashutosh Khajuria, chief financial officer and executive director at Federal Bank Ltd. “Auctions have gone up significantly this year," said Saurabh Kumar, head of gold loans at non-banking financial company IIFL Finance Ltd.

Is this rise in sales of pledged jewellery a sign of income stress faced by borrowers?

Yes, but that alone does not explain what is currently happening. Bankers who BloombergQuint spoke with explained that a confluence of factors is leading to liquidation of gold jewellery collateral. These factors include the fall in prices of gold, the higher loan-to-value ratio permitted for gold loans last year and a Supreme Court order which delayed classification of defaulted loans as non-performing assets.

RBI’s LTV Move & Margin Calls

One reason auctions have become necessary ties back to a relaxation in rules permitted by the RBI last August, amid the first wave of the Covid-19 crisis. At the time, to help mitigate the economic impact of the pandemic, banks were allowed to give out gold loans of up to 90% of the of the gold, known in technical parlance as the loan-to- ratio. This was permitted till March 31, 2021. Until then an LTV of 75% was allowed.

However, the RBI’s announcement came at a time when gold prices were near a peak. Since then, local prices have corrected close to 18%. With the of the underlying gold falling, lenders sought either additional gold or a part-payment of the loan. If borrowers fail to meet this additional requirement, lenders can auction the jewellery pledged to recover the principal amount.

The price fall has meant that in many cases, the of the outstanding loan is up to 98% of the underlying security, said Rajendran. If borrowers haven’t yet made part-payments or given additional security to bring down the LTV ratio, lenders will be forced to resort to auctions of the gold jewellery collateral as a last resort, he explained. “However, a complete picture may emerge only after these auctions are completed, as some borrowers may still regularise their accounts closer to the auction date.”

The underlying issue though remains the capacity of the borrowers to provide additional security or repay loans.

Kumar, who heads the gold loans business at IIFL, said auctions have increased primarily because gold prices have fallen considerably from their peak in August, with some cases seen where people are not regularising their accounts as the recent lockdown curbs have caused business disruption and job losses.

“We’re focusing on ensuring timely collections to ensure we minimise auctions,” he said.

Khajuria of Federal Bank explained that banks saw a sharp rise in gold loans last year because of higher prices and the RBI’s relaxation in LTV rules.

“Last year, lenders saw an immense growth in their gold loan portfolio as higher gold prices meant higher loans, and since these loans are secured, most banks and non-bank lenders were relatively comfortable sanctioning them during the pandemic,” said Khajuria. “And then the central bank’s move to raise loan to limits further pushed up gold loan amounts.”

Now since the RBI’s special dispensation has expired, the LTV ratio of gold loans has come back to 75%. Therefore, any new loan amount sanctioned on the same collateral is lower, while borrowers are also required to furnish additional collateral or make part-payment as margin calls get triggered on their existing loans due to fall in gold prices.

“This has doubly impacted the borrowers at a time when their own incomes were falling,” he said. “As fewer people show up to regularise their loan accounts, gold auction is the only way left for lenders to recover these loans.”

Delayed Recognition Of Bad Loans

A smaller factor in the bunching up of auction of gold collateral is the delay in recognition of bad loans, bankers told BloombergQuint.

A Supreme Court interim order had prevented banks from tagging accounts as non-performing after August 31. The order has now been lifted. In the interim, while banks were putting out data on pro forma non-performing assets for accounting purposes, they were not initiating recovery proceedings against individual accounts, BloombergQuint had reported earlier.

Therefore, gold auctions for those borrowers who defaulted on their loans last year will also happen now, partly explaining the sudden rise in auctions.

Banks Vs. NBFCs

The auctions of gold collateral are coming more from banks than from non-banks. One reason for this is that the higher loan-to- ratio was permitted only for banks. Besides, non-bank lenders tend to give shorter tenure loans, leaving them less exposed to price volatility.

The rise in gold auctions is likely more among banks than specialised gold financers that give shorter tenure loans, said Siji Phillip, senior analyst at Axis Securities. “Banks give gold loans for relatively longer tenures of up to a year compared to specialised NBFCs that usually give short-term loans of up to three months,” she said. “Therefore, the ability to recover gold loans is higher for NBFCs than banks.”

As these defaults get recognised on bank’s books, combined with the impact of lower LTV cap becoming applicable from April, banks are likely to be more affected than the NBFCs, she said. “The concern is bigger for those banks that gave more loans at higher LTV ratios.”

“All in all, if the pandemic situation fails to improve, we are likely to see gold auctions inching up for most lenders, especially banks,” she said. “Therefore, keeping a tight leash on collection efficiencies and default rates will remain very important.”

An e-mail query sent to Muthoot Finance Ltd. did not elicit a reply, while Manappuram Finance Ltd. declined to comment, citing silent period ahead of their fourth quarter results announcement. Both are gold loan-focused NBFCs.