Commercial banks and non-bank lenders may have to review their policies in this segment due to falling gold prices, experts said.
Gold loans from the country’s commercial banks rose 132% last year, according to the latest credit growth data from the Reserve Bank of India. This has helped banks grow their loan portfolios at a time when lending to many other sectors was contracting due to risk aversion and asset quality issues.
But now the value of the collateral against the loans has plummeted as the price of gold has dropped from Rs 51,000 per 10g in early January to Rs 45,000 now.
“The banks will now focus on the recovery,” said CVR Rajendran, Managing Director of CSB Bank. “The loan-to-value ratio will be readjusted.”
This means moving forward, as long as the price of gold remains moderate, these loans may not represent large amounts.
At the start of the fiscal year, the RBI relaxed the loan-to-value ratio allowed for gold lending to 90%, making it easier to access easy secured loans for those affected by the Covid-induced foreclosure that disrupted jobs and household cash flow.
“These are usually three to four month loans that are secured and are also cheaper than unsecured personal loans,” Rajendran said.
With access to easy liquidity and cheaper rates compared to NBFCs and private financiers, many borrowers turned to banks for gold loans and also had many new borrowers due to the crisis, said another banker. Moreover, what added to the comfort was the rise in the price of gold which added value to the collateral.
NBFCs specializing in gold lending said the impact on demand would not last long as they expect the improving economy to spur credit needs. They expect their gold loan assets under management for the current quarter to likely decline 1.5-2% due to the correction in gold prices, but then accelerate.
“The withdrawal of gold loans has slowed somewhat in recent days, which can be attributed to the sharp correction in gold prices during the current quarter,” said VP Nandakumar, Managing Director of Manappuram Finance. “In general, the price of gold does not have a significant impact on the underwriting of gold loans beyond the short term, as this is mainly driven by the broader demand for credit in the economy. , especially in the unorganized sector and the rural economy. . ”
In the short term, however, a period of rising prices improves sentiment and gives demand a temporary boost, he said. “Likewise, falling prices may have a temporary impact on demand, but then, as prices stabilize, it quickly becomes the new normal and business picks up as usual.”