Gold price correction may not hit NBFCs lending against in terms of asset quality as much as it would hit banks because banks have lent at higher LTVs, according to ratings firm . Besides NBFCs are more agile in monetising the collateral and hence have lower credit costs, it said.
Apart from regular interest collection over the past few years, they have ensured that disbursement loan-to-value (LTV) is maintained below 75%. Gold prices have slipped over 10 per cent over the last six months.
For NBFCs, the average portfolio LTV as on December 31, 2020, was 63-67%, while average LTV on incremental disbursements in the October-December 2020 quarter was 70%. Also interest receivables remaining are at just 2-4% of the loan book over the past few years.
For banks, however incremental-disbursement LTV was higher at 78-82% because they were more aggressive than NBFCs in lending against gold during last fiscal. Much of the growth in their book came during the third quarter of last fiscal, when gold prices were soaring.
Since June 2020, loans against gold surged even as lending to other segments was affected by asset-quality concerns. In the 11 months through February 2021, loans against gold grew 70% for banks to over Rs 56,000 crore. The LTV relaxation to 90% for banks announced by the Reserve Bank of India in August 2020 also added to this growth.
” Given that gold prices have dropped 18-20% from their August peaks on an absolute basis, without periodic interest collections, the books of banks may be susceptible to asset-quality issues to some extent ”said Krishnan Sitaraman, senior director & deputy chief ratings officer, Crisil Ratings.
Disbursements, LTV and timely interest collection have a significant bearing on the cushion available with lenders in terms of value of gold given as collateral compared with the loan outstanding. This, in turn, impacts asset quality. Therefore, robust risk management systems and timely auctions are crucial to offset volatility in gold prices, Crisil said.
“While gross non-performing assets could rise, ultimate credit cost – a more appropriate indicator of asset quality for gold loans – is not expected to rise” said Ajit Velonie, Director, Crisil Ratings. ” Historically, while GNPAs had risen to as much as 7% for NBFCs, credit costs were low at 10-80 basis points. “This underscores sound business acumen and strong track record of timely auctions (of collateralised gold). For banks, given the sharp growth they have seen, monitoring LTV and staying agile are imperatives to avert potential asset-quality challenges ” Velonie said.