Gold loan companies' credit quality to remain stable: Crisil

Crisil believes that the Reserve Bank of India's (RBI) removal of the priority sector lending (PSL) benefits to commercial banks for loans to gold loan companies, is unlikely to impact the credit profiles of its rated gold loan companies.

The removal of the PSL benefit will marginally diminish the attractiveness for banks to lend to this sector. Rupali Shanker, Head - Crisil Ratings says, “We believe that the removal of the PSL benefit, together with hardening interest rates, will lead to an increase in the cost of bank funding for gold loan players. These entities will try to access funds from capital markets more frequently to mitigate the impact of this increase.”  This will lead to an increase in the gold loan players' borrowing costs by 150 to 200 basis points. The annual growth in gold loan companies’ portfolios (aggregating Rs 19,500 crore as on September 30, 2010), will reduce to less than 50% over the medium term, from nearly 75% in the past three years.

“Despite the expected increase in cost of borrowing, gold loan companies’ profitability will remain strong, driven by high yields, improvement in operating efficiencies, and low credit costs,” adds Shanker. The net profitability margin of these companies is expected to remain comfortable between 4 and 5%, despite declining from the 5 to 7% levels reported in 2009-10.

The credit profiles of the gold loan players will continue to be supported by their stable asset quality, comfortable capitalisation and established track record. Pawan Agrawal, Director - Crisil Ratings says, “These strengths will enable them to withstand the impact of moderation in  growth and profitability arising from the recent regulatory development.” Crisil will continue to assess the impact of future developments in the regulatory landscape on the credit quality of its rated gold loan companies.

Till recently, most of the bank loans and assignment transactions of gold loan companies qualified for the PSL benefit. Therefore, these entities have tended to rely heavily on bank funding. Loans from banks constituted nearly 75 per cent of these entities’ aggregate borrowings as on September 30, 2010. The PSL benefit has also helped gold loan companies maintain a low cost of borrowings from banks, at 8-10.5%. 

With the attractiveness for lending to the sector diminishing marginally, the gold loan companies’ growth rates are expected to decline. Crisil  expects competition for gold loan players from banks and other lenders to intensify. The gold loan companies will look to diversify their sources of funding by focusing on capital market instruments, retail debentures, and subordinated debt.