Industry
Why the surge in gold loans raises red flags
Summary
- The surge in gold loans, and practices around it, are raising the hackles of the banking regulator and policymakers.
Are regulators and policymakers getting worried about the gold loan market? Earlier this month, the Reserve Bank of India barred IIFL Finance, the country’s second-largest gold loan non-bank finance company (NBFC), from disbursing fresh gold loans.
This comes on the heels of the finance ministry last month asking all banks to review their gold loan portfolios, according to news agency PTI. The ministry flagged issues strikingly similar to the IIFL case, including inadequate collateral, repayments in cash, and problems around collection of fees.
In the IIFL case, the central bank found “serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc."
Gold loans, once a mainstay of mainly NBFCs, soared during covid, which affected life in India from March 2020 onwards, and its aftermath. Families, without access to credit otherwise, put up gold ornaments and possessions as collateral for loans at a time when other sources of income dried up.
The incentive to take gold loans was driven by two factors. One, a move by the RBI to increase the loan-to-value ratio of non-agricultural gold loans from 75% to 90%. Thus, for ₹100 worth of gold, lenders could issue a loan worth ₹90, against ₹75 previously. Two, a sharp jump in the price of gold itself.
Banks vs NBFCs
Although banks steadily expanded their gold loan portfolios, NBFCs still account for around 60% of gold loans. According to rating agency Crisil, “While NBFCs are known for their servicing agility, banks have focused on borrowers seeking bigger loans and competitive interest rates…banks have sharpened focus on non-agricultural gold loans for personal use, particularly in the ₹3 lakh and above ticket sizes, over the past 3 years."
The fast pace of gold lending, and the backdrop of distress in which it happened, meant an increase in bad loans was likely. Gross non-performing assets (NPAs) of gold loan NBFCs increased from 0.5% in 2021-22 to 2.3% in 2022-23. Yet, NPAs on gold loans are below that of other types of loans. Contributing factors include the collateral, the rise in gold prices, and the sentimental value placed by households on gold assets such as jewellery put up for collateral, ensuring that default on such loans is a last resort.
Gold Loan Troika
But it did cause the regulator to sit up and take notice. Between them, the top three gold loan companies—Muthoot, IIFL and Manappuram—account for close to three-quarters of the gold loans given by NBFCs that were outstanding as of March 2023. Muthoot is a clear leader, at 43% market share. The pitched battle for market share is between the second- and third-place institutions, IIFL and Manappuram.
Before the pandemic, Manappuram was well ahead of IIFL, with almost double the market share (15% vs 8%). But IIFL’s aggressive push during the pandemic and post-pandemic years, meant that it leapfrogged Manappuram in March 2023. By December 2023, IIFL accounted for ₹24,692 crore worth of gold loans, compared with ₹19,900 crore for Manappuram. But it was also this aggressive growth that led the RBI to sit up and take notice, and following inspections, to impose curbs on new business by IIFL.
Gold Auctions
The sentimental value attached to gold in Indian society makes defaulting on gold loans rare. A rise in default rates is sign of distress among borrowers. The surge in distress gold loan borrowing during the pandemic was followed by defaults, causing lenders to auction gold collateral to recover loans. Gold auctions soared as a result. Muthoot conducted ₹7,440 crore worth of auctions in 2021-22, against ₹385 crore in 2020-21.
The first nine months of 2023-24 have been the quietest yet in terms of gold auctions, but ominously, the December quarter saw a sharp jump in auctions by both Muthoot and Manappuram. Muthoot conducted ₹381 crore worth of auctions in December 2023, up from ₹236 crore in September and ₹110 crore in June. Manappuram conducted ₹124 crore worth of auctions in December, up from ₹14 crore in June 2023 and ₹15 crore in September. Numbers the regulator is watching, with some concern.
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