Companies lending against gold are auctioning the collateral in higher quantities to recover stressed loans, at a time of rising regulatory scrutiny over the sector. Gold auctions that rose sequentially in the second quarter are expected to rise further in the ongoing December quarter, experts said, since directions from the Reserve Bank of India (RBI) pertaining to gold loans came only at the end of the second quarter.
Cumulative data on gold auctions is not available; however, leading gold loan financier Muthoot Finance Ltd said at an analyst call that it auctioned gold worth ₹69 crore in the first quarter, followed by ₹250 crore in the second quarter.
Another gold-focused non-bank lender, Manappuram Finance, said in its analyst call that it auctioned gold worth ₹360 crore in the second quarter. The company said it has an average book loan-to-value (LTV) ratio of 58%, against the regulatory maximum of 75%. LTV of 75% means a gold loan of ₹75 should be backed by gold collateral worth ₹100.
A few weeks to kick in
Experts said the auction process and the recalibration in gold lending practices by lenders, following the RBI’s new guidelines, is expected to take a few weeks, which means the bulk of the impact of rise in auctions is likely to be seen in the third quarter.
“A lot of regulatory overhaul has played out for gold loan NBFCs,” said Jinay Gala, director, India Ratings & Research, adding there has been a rise in gold loan auctions as NBFCs look to adhere to the streamlined norms.
“Traditionally, gold financiers used to carry the collateral gold because they had the comfort that gold prices are on a rising trend. However, lenders are now ensuring clear and standardized auctioning policies in accordance with regulatory guidance, which means they can’t keep holding on to the gold on a continuous basis,” he added.
The revised mandate by RBI requires lenders to recalibrate their lending and auction practices to ensure standardisation in use of third parties for sourcing and appraisal of loans, valuation of the collateral gold in the presence of the customer, adequate due diligence and lack of end use monitoring of gold loans, transparency during auction of gold ornaments and jewellery, ongoing monitoring of LTV, and appropriate application of risk-weights.
George Alexander Muthoot, managing director of Muthoot Finance, told Mint that the company always considers auctions as a last resort. “We prioritize supporting customers by providing extended time for loan repayment, ensuring they have every opportunity to reclaim their pledged gold,” Muthoot said.
Muthoot said his company auctions loans only when they turn non-performing assets (NPAs), adding even in such situations, it grants them more time to recover their gold. “In many cases, this approach leads to successful loan closures within three to four months, as customers repay and retrieve their assets,” Muthoot added.
The background
The central bank, which prohibited IIFL Finance Ltd from issuing fresh gold loans in March 2024, has been cracking down on gold financiers. Its common concerns include: Breach of LTV ratios; varying auction policies and processes; and deviations in assaying and certifying the pledged gold’s purity and weight while sanctioning loans and auctioning on default. The ban on IIFL Finance was lifted on 19 September.
In May 2024, RBI tightened the cash route in gold loans. It said gold loan lenders can hand out a maximum of ₹20,000 in cash against the pledged gold. For any higher amount, the money has to be deposited in the borrower’s account. In September 2024, it asked them to thoroughly review their policies, processes, and practices to identify any gaps within three months, and closely monitor the high growth in the segment.
Bank credit against gold jewellery rose sharply to grow at 56.2% on year as of 18 October 2024, as against 13.1% in the previous year, as per latest data by RBI.
The central bank’s directions came at a time of rising stress in gold loans, along with the strong growth in gold loans.
Loans unpaid for up to 30 days are tagged Stage-1 assets, those due for 30-90 days are Stage-2 assets, and those due for over 90 days are Stage-3 assets. At Muthoot Finance, Stage-3 assets rose to 4.3% of outstanding loans in the second quarter, compared with 3.3% at the end of the March quarter, and 4% a year earlier. For Manappuram Finance, similar numbers were 2.4% in the second quarter, up from 2% at the end of the March quarter, and 1.6% a year earlier.
The impact of LTV
For gold loan companies, a high LTV usually indicates higher risk.
“A lot of the NBFCs used to look at 75% LTV (the mandated level) as entry LTV, but RBI clarified that it is exit LTV, which means that the principal plus interest cannot cross 75%. We were doing 75% entry LTV for about 50% of the portfolio,” the head of a large non-bank lender said on the condition of anonymity.
Entry LTV is the minimum LTV considered as per the principal amount lent at the time of sanction of the loan. Exit LTV is the maximum LTV, including principal amount and interest due, that needs to be adhered to by lenders during the tenure of the loan
When RBI noted the matter in its annual inspection, several NBFCs proposed marking these loans NPAs, making provisions against them, and recovering the money by selling collateral. “However, RBI said you need to go back on the LTV because it is violating guidelines,” he added.
This meant lenders had to go by lower LTV, making new loans smaller than earlier (which resulted in lower ticket sizes for such loans being sanctioned compared to earlier). This, combined with higher compliance costs to follow revised regulations, could reduce the profitability of gold financiers in the short to medium term as customers and employees adapt to the changes, industry experts said.
“There are heightened audit checks and risks and balances being built in, all of which require additional manpower and monitoring. Accordingly, the breakeven gold loan AUM per branch is on the rising trend,” India Ratings’ Gala said, adding that so far, the gestation period for breakeven has been stable supported by the rise in gold prices.
“As such, larger players are seeing more value-led growth whereas smaller players are seeing growth in terms of both volume and value,” he said.
Demand continues
Despite the ongoing recalibration and some amount of expected slowdown in lending, industry experts expect demand for gold loans to remain strong going into 2025, especially given the significant slowdown in the pace of growth of unsecured and personal loans.
The steady rise in gold prices and expectations that gold will continue to grow is also making this a good time for lenders to auction the precious metal while ensuring high recovery levels.
Spot gold prices, as per MCX data, have risen 12.3% so far in FY25 and 19.5% YTD (year-to-date) to ₹75,233 per gram as of 20 December, 2024. On year, prices were up 21% from ₹62,197 per gram a year ago.
In a report in October 2024, CRISIL Ratings had said that any change in asset classification norms could lead to an increase in reported delinquency levels (both overdue and NPA). It’s possible to offset the impact of this on credit loss by “conducting auctions in a timely manner”, the agency had then said adding that a reassessment of business sourcing and audit policies is expected to increase the operational intensity and lead to a slowdown in business growth.
“The gold loan sector in India is experiencing an unprecedented growth, with a 41% year-on-year surge. The gold loan market is projected to grow significantly, with an estimated market size of ₹15 trillion by 2027,” Muthoot said, adding that the company has revised upwards its gold loan growth guidance for FY25 to 25% from the earlier 15%.