Volatility raises stress on gold loan books of banks

However, scope for large-scale delinquencies limited due to frequent part-payments, regular auctions of pledged gold jewellery

Volatility in gold prices has bankers worried. The rise or fall in prices has complicated the loan-to-value (LTV) ratio calculations and bankers aren’t ruling out slippages in gold loan portfolios in case of a sharp correction in prices.

“Given 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. Analysts estimate the gold loan LTV ratio for banks stands at about 70 per cent. This means if a borrower pledges gold jewellery worth Rs 100, banks would offer him a loan of up to Rs 70. If the price of gold falls sharply, the value of the pledged jewellery also decreases and, consequently, banks’ credit risks rise.

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

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

“Earlier, auctions were conducted infrequently. But now, it has become a routine affair. In most cases, however, we find 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,” said the chief executive of a private bank.

Banks worried about price fluctuations have started lowering LTV ratios on gold loans. This is likely to cap the growth in banks’ gold loan portfolios this financial year. “It is not that people aren’t pledging gold, but the loan amount is less compared to last year. Also, because of the auction notices, the repayment rate is rising and now, redemptions are more than disbursements. We were hoping for 30-35 per cent growth in our portfolio this year. But now, it seems we have to settle for 15-20 per cent growth,” said a banker.

SHAKY GROUND

* Analysts estimate the gold loan LTV ratio for banks stands at about 70%

* If gold prices fall sharply, value of pledged jewellery falls and credit risks rise

* In most cases, borrowers make a part-payment when an auction notice is sent

* Banks worried about price fluctuations lowering LTV ratios on gold loans