Fin stress and the low loan-to-value rule may slow down the gold lending trade


CHENNAI: On Wednesday evening, after Manappuram Finance said in a presentation to investors that it had auctioned gold worth Rs 404 crore in the January-March quarter (Q4FY21), up from Rs 8 crore Over the previous three quarters combined, this has raised doubts among lenders if Covid-induced stress arises. While the jury is still out on this, there are signs gold loans may lose some shine after the RBI returns to its pre-Covid loan-to-value (LTV) ratio of 75. % from the 90% level (which it announced in August 2020).
RBI data showed that at the end of fiscal year 21, the total value The outstanding gold loans were nearly Rs 60,500 crore – up 82% on the year. In FY22, that growth rate could slow down significantly, industry players said.
According to the presentation of Manappuram Finance, a leader in the gold lending segment, its autonomous gross non-performing assets (GNPA) and its net NPAs were both up at the end of Q4FY21 to almost the same levels recorded shortly after the demonetization in November 2016. However, he said he kept the bad debts with the GNPA at less than 2%.

According to industry experts, the stress in the gold lending segment could be seen in the lower levels of the market and mainly with the NBFCs, but not so much in those put forward by the banks. “We haven’t seen a big increase in delinquency in our books this quarter compared to the last. There is a slight increase because the last quarter was a moratorium quarter, ”said Shripad Jadhav, president and CEO of tractor finance, crop finance and gold loans at Kotak Mahindra Bank. “Rigorous risk practices, good collection processes and profile verification during onboarding help us maintain the quality of the pool and also a low delinquency rate.”
Financial stress also forces people to sell gold to realize its full value, rather than committing the same way to obtaining loans that would not exceed 75% of its value. This is after the RBI returned to 75% of the LTV from 90% earlier. “With the return of the LTV to 75%, there is a drop in demand for gold loans. People are keen to sell gold jewelry for full value because they don’t have the repayment capacity if they promise it. And for existing clients who want to renew their gold loan, we see the LTV slide to 68-70% after deductions, ”said IIFR Vice President Mohan Sharma. The combined impact of economic tensions at the lower level and the rise in the LTV could lead to a slowdown in gold lending activity. A senior City Union Bank official said demand for gold loans has been sluggish in recent months. “The poor sell the promised gold jewelry to pawn shops and get back the difference. There is a huge impact on new loans, especially with the current foreclosure. The customers are not able to redeem the jewelry due to the lack of income in this stuck situation and bad business, ”the banker said.

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