Gold price drop may not impact NBFCs

Mumbai: The recent fall in gold prices is unlikely to affect the asset quality of non-banking financial companies (NBFCs) lending against gold in a considerable manner, according to a report.

However, banks that were aggressively disbursing gold loans during the last fiscal may see some impact on their asset quality, Crisil Ratings said in a 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, it said.

The LTV relaxation to 90 per cent (only for banks) announced by the Reserve Bank of India (RBI) in August 2020 also contributed to this growth. The increase in the LTV ratio on gold loans by banks was applicable up to March 31, 2021. "Given that gold prices have dropped 18-20 per cent from their August peaks on an absolute basis, without periodic interest collections, the books of banks may be susceptible to asset-quality issues to some extent," Crisil Ratings Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said.

He, however, said with the LTV dispensation period ending in March 2021, incremental lending would have a more LTV cushion. 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.