Banks see rise in stress in gold loan portfolio on volatile prices

The rise and fall in the price of the yellow metal is keeping bankers worried.

The volatility has complicated the loan-to-value (LTV) ratio calculations and bankers are not ruling out slippages in their gold loan portfolios if there is a sharp correction in prices.

"Given the fact that gold prices have been volatile in the last few months, we are seeing some early signs of credit slippage. We want to be cautious on our gold loan portfolio in the current environment," the retail banking head of a large private sector bank said on condition of anonymity.

Industry analysts estimate that the gold loan LTV ratio for banks is currently around 70%. In other words, if a borrower pledges gold jewellery worth Rs 100, banks will offer him loan up to Rs 70. Hence, if the price of the yellow metal falls sharply the value of the pledged jewellery also decreases and consequently credit risk for banks goes up.

"There were serious issues with LTV ratio in the first quarter when gold prices fell. The LTV ratio for many banks went beyond 90%. The current situation is not as bad as prices have recovered in the past few months. But there is no guarantee that prices will continue to remain firm. We are monitoring our portfolio on a regular basis," a senior executive of a mid-sized Kerala-based private sector bank said.

Bankers, however, claim that scope for large scale delinquencies is limited. Banks are asking borrowers either to repay a part of the loan or provide additional collateral whenever gold prices fall. Lenders have also started conducting regular auctions of pledged gold jewellery and are able to recover their money.

"Earlier auctions were conducted infrequently but now it has become a routine affair. In most cases, however, we find that borrowers are repaying the money or making a part payment whenever an auction notice is sent. In India, people are still highly sentimental about their gold ornaments and that is a saving grace," chief executive of a private sector bank said.

Banks worried about price fluctuations have also started lowering their LTV ratio on gold loans. This is likely to cap the growth in banks' gold loan portfolios in the current financial year.

"It is not that people are not pledging gold but the loan amount is less compared to last year. Also, because of the auction notices the repayment rate is rising and redemptions are now more than disbursements. We were hoping for 30-35% growth in our portfolio in the current year. But now it seems we have to settle for 15-20% growth," said a banker.