The recent fall in gold prices is unlikely to affect the asset quality of non-banking financial companies (NBFCs) lending against gold in any considerable manner, according to a report published by rating agency, CRISIL. “However, banks that were aggressively disbursing gold loans during the last fiscal may see some impact on their asset quality,” CRISIL Ratings said in the report.
On a 30-day rolling basis, the gold price has corrected around 10 per cent over the past six months, while on an absolute basis it has fallen twice that rate. “The correction in gold prices in recent months is not expected to materially impact the asset quality of NBFCs lending against gold,” the agency said.
Apart from periodically collecting interest over the past few fiscal, NBFCs have ensured that disbursement loan-to-value (LTV) is maintained below 75 per cent, it said. For NBFCs, the average portfolio LTV as of December 31, 2020, was close to 63-67 per cent, while the average LTV on incremental disbursements in the October-December 2020 quarter was around 70 per cent.
The LTV discipline at NBFCs is also evident in interest receivables remaining at just 2-4 per cent of the loan book over the past few years. For banks, however, incremental-disbursement LTV was higher at 78-82 per cent because they were more aggressive than NBFCs in lending against gold during the last fiscal, the report said. In the 11 months through February 2021, loans against gold grew roughly 70 per cent for banks to over Rs 56,000 crore, the CRISIL report said.
The report said disbursement LTV and timely interest collection have a significant bearing on the cushion available with lenders in terms of the 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 offsetting volatility in gold prices and ultimate credit loss, the agency said.