Gold loan demand has picked up in Q2: Report

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Despite a decline in the first quarter, assets under management (AUM) of non-banking financial companies (NBFCs), which predominantly give loans against gold, are likely to climb 18-20% to Rs 1.3 lakh crore this fiscal, according to a report.

According to Crisil Ratings, demand for gold loans from micro-businesses and individuals to fund working capital and personal needs has surged due to an uptick in economic activity and the start of the Christmas season.

Disbursements have increased dramatically in the second quarter of the current fiscal year, ET quoted Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil Ratings, as saying. Gold loans will remain a popular asset class, he said.

Gold loans

Gold loans are a highly protected and liquid asset class that delivers excellent returns with fewer credit losses. As a result, NBFCs are better positioned than those that lend to most retail asset classes other than gold loans, particularly during periods of asset-quality pressure brought on by the pandemic.

Because of effective risk management techniques such as frequent interest collection (which maintains the loan-to-value, or LTV, ratio under control) and timely gold auctions, gold-loan NBFCs have historically witnessed small losses.

NBFCs fare better

Keeping LTV in check adds to the comfort. Sharp changes in the price of gold, on the other hand, would have an impact on both the portfolio and disbursement LTV ratios because it affects the lender’s buffer.

Lenders experienced this problem in the previous fiscal year since gold prices plummeted between January and March 2021, following a peak in August 2020.

NBFCs, for their part, have successfully navigated the scenario. Banks, on the other hand, have been less vigilant, resulting in an increase in delinquencies and difficulties rolling over a portion of their portfolio to 75% LTV (as per current RBI rules) after the 90% LTV concession expired in March 2021.