Diving gold prices may not hit banks' asset quality

Cautious lending, lower LTV have reduced asset quality risks, bankers claim

The dip in the price of the yellow metal is not keeping bankers worried this time. Cautious lending, continuous monitoring and a lower loan-to-value (LTV) ratio appear to have made bankers more confident in managing the stress on their gold loan portfolio, despite the price volatility.

“We had learnt our lesson a year back (when gold prices crashed). At that time, we were lending aggressively and no one envisaged a price correction. But since then, banks have been extremely cautious in offering loans against gold jewellery. The LTV ratio has been reduced, the portfolio is closely monitored and many of us have actually reduced the gold loan book size. I don't expect price fluctuation to create any serious stress on our gold loan portfolio,” a senior banker, in charge of retail banking business of a mid-sized private bank, said.

Gold prices have been falling as its safe-haven status appears to have reduced following signs of easing tensions in Ukraine. Media reports quoted a consultancy, Metal Focus, predicting gold prices to sink to their lowest since 2010 as the US economic recovery gathers pace.

“We believe that the risk premium in gold is unlikely to stay longer... Broadly the geopolitical factors may underpin prices at lower levels but are unlikely to propel prices significantly higher in the current backdrop,” Navneet Damani, associate vice-president at Motilal Oswal Commodities Brokers, said in a recent note to clients.

But industry analysts point out the shrinking size of banks' gold loan books will probably prevent severe deterioration in their overall credit quality.

Consider this: HDFC Bank's gold loan portfolio was at Rs 4,042 crore at the end of March, 2014, compared to Rs 4,965 crore a year earlier. The share of gold loans in the lender's total retail advances slipped to 2.7 per cent from 3.6 per cent during this year. Similarly, Federal Bank's gold loan book declined to Rs 3,590 crore from Rs 4,263 crore between March, 2013, and March, 2014.

Bankers say that while lenders turned cautious, price volatility also turned customers reluctant in borrowing money by pledging their gold jewellery. This also contributed to the dip in banks' gold loan books. “If in 2012 you were eligible for Rs 100, then in 2013 due to declining prices your eligibility was probably Rs 75. As a result, customers did not want to borrow and hence the incremental acquisitions were low,” Mahesh Dayani, country head for retail assets at ING Vysya Bank, said.

With the Reserve Bank of India (RBI) capping banks' gold loan LTV ratio at 75 per cent, which created a level playing field between banks and non-banking financial companies (NBFCs) offering such loans, incremental lending opportunity for banks have further reduced. But in the current environment bankers are not complaining.