Assets under management (AUM) of non-banking financial companies (NBFCs), which primarily offer loans against gold, is expected to rise 18-20% to Rs 1.3 lakh crore (see chart 1 in annexure) this fiscal. This would be despite a contraction in the first quarter, when the pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.

Demand for gold loans from micro enterprises and individuals – to fund working capital and personal requirements, respectively – 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.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter. 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.”

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.

Historically, gold-loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection (which keeps the loan-to-value, or LTV, under check) and timely auctions of gold.

Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold impacts both, the portfolio and disbursement LTV¹ 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 (as per current Reserve Bank of India guidelines) after the 90% LTV dispensation² ended in March 2021; banks’ loan against gold jewellery portfolio grew by ~80% in fiscal 2021.

Says Ajit Velonie, Director, CRISIL Ratings, “Gold-loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check. 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.”

Timely auctions have ensured that credit costs – a more appropriate indicator of asset quality for gold-loans – remained in check at 30 basis points (see chart 2 in annexure), well within the historical range. With leverage being low and pre-provision profitability remaining strong, CRISIL Ratings expects the overall credit profile of gold-loan NBFCs to remain stable.

¹ Portfolio LTV is LTV of the outstanding AUM as on a specific date
² The RBI announced LTV relaxation from 75% to 90% for banks in August 2020, which ended in March 2021