Gold Loan NBFCs To Witness 15-18% Growth In FY21, Says Crisil
Gold loan non-banking financial companies are likely to see a 15-18% growth in their asset under management this fiscal helped by higher demand from gold loans from individuals and micro-enterprises, says a Crisil report.
Growth in gold loans was flat in the first quarter of this fiscal because of low disbursements in April and May due to the country-wide lockdown.
With the Covid-19 pandemic-driven lockdowns being lifted slowly and economic activity clawing back, demand for gold loans would rise, especially from individuals meeting urgent personal requirements and from micro-enterprises for working capital to restart businesses, the rating agency said in the report.
Gold loans would be preferred also because NBFCs and banks have tightened their underwriting norms for other loans, leading to cautious lending to micro and small enterprises, traders and the self-employed.
"That, and higher average gold prices on-year mean gold-loan assets under management of NBFCs could grow 15-18% this fiscal," the report said.
The agency's senior director Krishnan Sitaraman said unlike other asset classes, gold loan has not faced major issues in collection and disbursement, or re-pledge of loans, barring in the stringent lockdown phase in April and May.
He said with many NBFCs facing collection challenges and a likely increase in delinquencies, fresh disbursements, especially to the MSME and unsecured loan segments, have remained low.
"Consequently, gold-loan financiers are expected to benefit. Preliminary estimates indicate that gold loan disbursements, including re-pledge, at NBFCs have more than doubled sequentially in the second quarter of this fiscal," Sitaraman said.
In August this year, the Reserve Bank of India had increased the permissible loan to value ratio for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75% to 90%. The increase on LTV ratio on gold loans was for banks and is applicable up to March 31, 2021.
While this will benefit banks focused on gold loans, any substantial weaning away of customers of large gold loan NBFCs will hinge on banks replicating the quick turnaround time, seamless disbursal process and flexible foreclosure options with interest rebate that the NBFCs are known for, and their customers are used to, Crisil said in the report.
The agency said the monthly static pool analysis of its rated gold loan NBFCs shows that for a typical 12-month loan product, 60-65% of the loan is foreclosed within the first six months.
The short tenure of most gold loans, the part-foreclosure option and associated rebates offered by NBFCs make them a convenient choice.
From a risk perspective, considering the increase and potential volatility in gold prices, calibrating disbursement LTVs and focusing on timely auctions become the key monitorables, it said.
For the June 2020 quarter, average LTV of the top five gold-loan transacting NBFCs was 55-60% versus 60-65% last fiscal, which shows LTVs are calibrated with gold prices, it said.
The average LTV for the September 2020 quarter is unlikely to top 65% even if fresh disbursements are at higher LTVs, the agency said.
Over the past few years, NBFCs have been conducting timely auctions linked to LTV and gold price movement to manage delinquencies, the report said.
According to Crisil's director Ajit Velonie, NBFCs that don't get swayed by current demand amid higher gold prices and maintain their LTV discipline would fare better from an asset-quality perspective.
"The asset quality of gold-loan financiers has been steady with low annualised credit cost hovering around 30-90 basis points for the past several years. Even if GNPAs rise and gold prices fluctuate, the policy of auctioning highly liquid gold collateral in a timely manner will keep a leash on credit cost, he said.
The rating agency expects gold-loan NBFCs to maintain their credit profiles backed by healthy business growth, strong capitalisation metrics and solid asset quality by maintaining LTV at adequate levels besides carrying out timely auctions in case of delinquencies.