RBI to lower Loan-To-Value (LTV) ratio
On Wednesday evening, Manappuram Finance said in an investor presentation that it had resold gold worth Rs 404 crores in the January-March quarter (Q4FY21), compared to just Rs 8 crore in the preceding three quarters combined, raising questions among lenders about whether the Covid-induced stress was showing up. Although the verdict is yet to be out on this, there are indicators that gold loans are losing their lustre after the RBI reduced the loan-to-value (LTV) ratio from 90% to 75% (as announced in August 2020).
According to RBI data, the total value of gold loan outstanding at the end of FY21 was approximately Rs 60,500 crores, showing a growth rate of 82% in that year. The industry players said that this rate could slow down substantially in the coming year.
Manappuram Finance, one of the leading gold loan companies presented that its independent gross non-performing assets (GNPAs) and net NPAs both increased equally by the end of FY21. However, it said that its delinquencies with the GNPA have been lower than 2%.
The industry experts say that the lower levels of the market and mainly NBFCs may witness the stress in the gold loan industry. However, advanced banks may remain unphased. “In comparison to the prior quarter, we did not witness a significant increase in delinquency in our books this quarter. Because the previous quarter was a moratorium quarter, there is a tiny increase,” said Shripad Jadhav, president and business head of tractor finance, crop loan, and gold loans at Kotak Mahindra Bank. “Strong risk policies, effective collection operations, and a profile check during onboarding assist us in maintaining the pool’s quality as well as low delinquency.”
People are also selling gold to realise its full value rather than pledging it to receive loans for no more than 75% of its value due to financial difficulty. This is after the RBI reduced the LTV to 75% from 90% previously. “Demand for gold loans has decreased as the LTV has returned to 75%. People want to sell gold jewellery to get the full value because they can’t afford to return it if they pledge it. “We see LTV dropping to 68%-70%after deductions for existing clients who wish to renew their gold loan,” said IIFL VP Mohan Sharma.
The combination of lower-level economic hardship and an increase in the LTV could cause a halt in the gold loan sector. The demand for gold loans has been sluggish in recent months, according to a senior executive at City Union Bank. “Poor folks sell their pledged gold jewellery to pawnbrokers and get their money back. With the current lockdown situation, there is a massive impact on fresh lending. Customers are finding it difficult to get their jewellery back with poor income in this lockdown,” said the banker.