Gold Loan companies’ AUM Could Rise 18-20% This Fiscal

Crisil Ratings on Tuesday said that assets under management (AUM) of non-banking financial companies (NBFCs) that primarily offer loans against gold is expected to rise 18-20%to Rs.1.3 lakh crores this fiscal despite a contraction in the first quarter.

Demand for gold loans from micro enterprises and individuals to fund working capital and personal requirements has increased amid a pick-up in economic activity and the onset of the festive season, the rating agency has said.

“Gold loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter,” said Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil Rating. “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,” he 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 netter placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic.

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, or LTV, ratio under check) and timely auctions of gold.

Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold would impact both the portfolio and disbursement LTV ratio as it influences the cushion available with lenders.

Lenders face this issue last fiscal because gold prices fell sharply between January and March 2021, after the August 2020 peak.

On their part, NBFCs have maneuvered the situation well. Banks, on the contrary, were less proactive, so have seen a rise in delinquencies and faced challenges in rolling over a part of their portfolio to 75% LTV (as per current RBI guidelines) after the 90% LTV dispensation ended in March 2021. S-ET

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