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Gold loan-focused non-banks like Manappuram Finance have auctioned a record 1 tonne, worth 404 crore, of the pawned gold in the last quarter of 2020-21, indicating deepening distress among the public due to the pandemic and have warned that banks are headed to an NPA crisis from September quarter when gold loans with one-year tenure mature.

During the first wave of the pandemic, among the many measures the Reserve Bank announced to alleviate the financial distress of the public, one was to allow banks to offer 90 per cent of the value of gold in loans.

This helped millions of households, as it came amidst a massive spike in gold prices, which had crossed 5,600/gram in the peak of the pandemic last year.

Following this, public sector banks widened their gold portfolios, helping the organised industry touch 2 lakh crore in FY21, up from a tad over 1.6 lakh crore in FY20, according to industry data.

Of the gold loan industry of over 6 lakh crore, 75 per cent are with unorganised players/petty moneylenders and organised players control only 25 per cent or 2 lakh crore, of which 80,000 crore are with NBFCs and the rest 1.2 lakh crore are with banks.

“We've auctioned a record 1,000 kg of pawned gold in the March quarter, as against just 8 crore during the previous three quarters. But for us only the quantum is a high and not auctions as we auction every month, since our loan tenure is for three months only," VP Nandakumar, Manappuram managing director & chief executive, told PTI from his Thrissur headquarters.

For Manappuram, which auctions gold every month as it offers gold loans only for a three-month tenure unlike its peers which give 6-12 months tenure and banks invariably offering for one-year, it had auctioned just 8 crore during the first three quarters of the fiscal, taking the total recoveries from auctions to 412 crore.

What worries Nandakumar, however, is the bubble that was built last year when the prices were at record high and the banks which have lent at 90 per cent LTV and since then prices have been falling. Banks and most other NBFCs won't report asset quality issues in the March or June quarters as they have one-year loans. Their problems will crop up from the September quarter onwards, he warns.

“Banks, mostly public sector ones, are in more trouble due to their higher LTV of 90 per cent. For banks as much as 90 per cent of their gold loan books is labelled as priority sector lending," Nandakumar says.

When contacted, Thomas John Muthoot, chairman of Muthoot Pappachen Group that runs Muthoot Fincorp also echoed the same saying banks may face asset quality issues from the September quarter as prices are still 10-13 per cent below the peak of over 5,600 a gram. But he told PTI that they did not auction much, as they lend more in the 9-12 months tenure bucket.

AM Karthik, a vice-president at Icra Ratings, told PTI that gold loan NBFCs may not face a big NPA problem as they normally ask customers to furnish additional collateral if price falls below the loan amount. But he refused to comment on banks, saying normally banks don't disclose their gold auctions and gold loan portfolios considering the very small size of their books in their overall balance-sheets.

However, none of the leading private sector banks which declared their Q4 earnings hinted at any asset quality issues in their gold loan books. In fact, SBI sees more room for the bank to grow this book. “We've ramped up gold loan facility across the country and that helped us to grow from 3,000 crore a few years earlier to 20,000 crore as of March 2021. We see opportunities for another 10,000 crore this financial year," managing director, retail & digital banking, C S Setty said on the earnings day.

He said the bank's agriculture gold loan portfolio is also likely to be 4,000-5,000 crore more this year. Average LTV in our gold loan is 55-60 per cent and constitutes 3.5 per cent of total advances. On the asset quality, he said, "We've minimal stress in the gold loan portfolio and go strictly by the LTV and there is enough room there and the stress is very limited in our books".

IDBI Bank managing director Rakesh Sharma had also said in March that the bank is growing it gold loans portfolio, where it has a small exposure at present. For Manappuram though 404 crore in recoveries is a record on a quarterly basis its record was in FY16 when it had recovered 1,932 crore from auctions, when prices were not even half of FY21 rates, which in FY20 was only 116 crore and 419 crore in FY19.

However, auctions does not fatten the bottomline of a lender, Nandakumar said, because the Reserve Bank guidelines demand that the difference between the recovery and the loan amount has to be returned to the pawner excluding the interest.

Also, the pawner is also free to buy back the jewellery through the auction. Nandakumar said auctions helped them cap bad loans under 2 per cent, which normally used to be under 0.5 per cent. Most auctions took place in the North, he said, adding its vaults still safekeep 300 tonne gold.

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