The demand for gold loans from micro-enterprises and individuals to finance working capital and personal needs has increased amid a resumption of economic activity and the start of the holiday season, a indicated the rating agency.
“Gold loan disbursements rebounded strongly in the second quarter of this fiscal year after a dismal first quarter,” said Krishnan Sitaraman, senior director and deputy director of ratings at Crisil Ratings. “We expect momentum to continue for the remainder of this fiscal year. Gold lending will continue to be a sought-after asset class, while lenders remain cautious about the growth of many other asset classes. ‘retail assets,’ he said.
From a credit perspective, gold loans are a highly secure and liquid asset class that generates superior returns with minimal credit losses.
As a result, NBFCs that offer them are better positioned than those that provide loans to most other retail asset classes, especially in times of asset quality pressure caused by the pandemic.
Historically, gold lending NBFCs have suffered negligible losses due to robust risk management practices such as periodic interest collection (which keeps the loan-to-value ratio, or LTV, in check) and auctions. timely gold. Maintaining LTV discipline adds to the comfort. But strong fluctuations in the price of gold would impact both the portfolio’s LTV ratio and disbursements, as they would influence the cushion available from lenders.
Lenders faced this problem in the past fiscal year as gold prices fell sharply between January and March 2021, after the peak in August 2020.
For their part, the NBFC handled the situation well. Banks, on the other hand, were less proactive, so saw an increase in defaults and found it difficult to increase part of their portfolio to 75% LTV (according to current RBI guidelines) after the end of the loan period. the 90% LTV exemption in March 2021.