Assets under management of gold loan-focussed Non-Banking Financial Companies (NBFCs) are likely to grow 18-20 per cent to Rs 1.3 lakh crore this fiscal on higher demand for such loans, says a report.
CRISIL Ratings in a report on Tuesday also said demand for gold loans from micro enterprises and individuals — to fund working capital and personal requirements, respectively — has increased with the pick-up in economic activity and the onset of the festive season.
This trend also coincides with the easing of lockdown restrictions by several states.
The agency’s Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said gold loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter.
“We expect the momentum to continue for the rest of this fiscal. Gold loans will continue to be a sought after asset class while lenders would remain cautious about growth in many other retail asset classes,” Sitaraman said.
From a credit perspective, gold loans are a highly secured and liquid asset class that generates superior returns with minimal credit losses.
Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic, the report said
It noted that historically, gold loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection (which keeps the Loan-To-Value under check) and timely auctions of gold.
Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold impacts both the portfolio and disbursement LTV as it influences the cushion available with lenders.
Lenders faced this issue last fiscal because gold prices fell sharply between January and March 2021 after the August 2020 peak. On their part, NBFCs have manoeuvred the situation well, the report said.
“Gold loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check,” the agency’s Director Ajit Velonie said.
Besides ensuring periodic interest collection, these NBFCs do not flinch from conducting auctions when required — which rose sharply in March and April 2021 — to avert potential asset-quality challenges, he said.
With leverage being low and pre-provision profitability remaining strong, the agency expects the overall credit profile of gold loan NBFCs to remain stable.
