Gold loans are going to be a preferred avenue for the general population due to the heightened uncertainty around the Covid-19 pandemic. The aversive second wave of the pandemic has forced many states to enforce strict or partial lockdowns in their areas, which in return has threatened the livelihoods of daily wage workers and small businesses.
It is no news that every household in India owns some amount of gold jewelry, therefore gold loans are a preferred option for many at a time when unemployment and loss of income has become widespread.
Additionally, gold loans are one of the easiest ways for people to access cash during financial difficulties. They can get loan of up to 75 per cent of the value of the holding based on the prevailing gold price.
John Muthoot, chairman of Muthoot FinCorp Ltd, one of the leading non-banking finance companies (NBFC) in the gold loan space, stated that “The demand for gold loans is usually high when the unsecured loans (like personal and group loans) are not available. During periods of uncertainty like this, unsecured loans are not available,”.
He added that “Looking at the current off take, we see demand in the north, west and east. Some of the southern states like in the rural belts of Telangana and Karnataka are showing good demand,”.
Saurabh Kumar, head, Gold Loans at IIFL Finance, stated that “Gold loans are an over-the-counter product and a customer can walk out of the branch with a loan in 30 minutes,”. Talking about the high preference for the gold loan, he further maintained that “The burden on the customer is also low in a gold loan. They can choose to pay only the interest and repay the principal amount at the time of closing the loan.”
Talking about the effect of the lockdowns on gold loans, he stated that “Once things open up again, if an individual or a small business needs money, they are going to come to take a gold loan,”. “This was what we saw last year as well. Last year, the lockdown came as a surprise leading to uncertainty. There was a huge transaction flow once the lockdown was lifted.” he added. Thus as per Kumar’s comment on the situation, the extent of the demand will now depend on how the wave pans out.
As per reports, Financial institutions such as banks and non-banking finance companies saw a huge surge in gold loans last fiscal. According to industry estimates, last fiscal year, the growth in the loan book of non-banking finance companies in the gold loan space was around 15 per cent.
Additionally, outstanding loans against gold jewellery given by banks rose to 82 per cent. According to the data with the Reserve bank of India, it rose from Rs 60,464 crore as of March 2021, from Rs 33,303 crore as of March 2020.
RBI allowed banks to lend up to 90 per cent of the loan to value ratio. Loan to value ratio (LTV) is the amount of loan that can be given against the value of the collateral. This dispensation came to an end on 31 March.
Krishnan Sitaraman, senior director & deputy chief ratings officer, CRISIL Ratings stated that “Both banks and NBFCs preferred to lend against this liquid and high-quality collateral amid the risk aversion. For borrowers also, it provided a source of funds when they didn’t have access to other sources of funding,”. He added that “Gold is considered by Indians as a family heirloom and they typically use it as a last resort.
Falling gold prices
Typically, as it is known, in case of a default in repayment, the gold is auctioned away by the financial institutions.
Given, last year’s economic crippling, many firms had put off conducting auctions in the first half of the last fiscal. This was opted to give the borrowers more time for repayments. The then rising gold prices had provided sufficient cushion for the financial institutions.
But with gold prices now falling, auctions have picked up pace as the comfort available to lenders has reduced.
Gold prices have fallen from a peak of Rs 57,000 per 10 grams seen in August last year to around Rs 45,500 as of end March before recovering to around Rs 49,000 per 10 grams now.
Kumar stated that “Auctions were limited last year as the collateral value had gone up with an increase in gold prices. But gold prices have now come down thereby reducing the collateral value and that could explain the auctions,”.
Sitaraman explained that typically auctions are used as the last option. Talking about the NPAs in the gold loan segment, Sitaraman positively pointed out that NPAs in the gold loan segment were minimal and credit costs for the lenders were almost negligible.
Pointing out that for most NBFCs, the average LTV in the portfolio was well below the regulatory requirement of 75 per cent, he stated that “With a 75 per cent LTV, there is a decent amount of borrower’s equity,”.