Companies that lend against gold are auctioning off collateral in droves to recoup stressed loans amid growing regulatory scrutiny of the industry. Experts said the sequential increase in gold auction volume in the second quarter is expected to increase further in the current quarter as the Reserve Bank of India (RBI) issued instructions for gold loans only at the end of the second quarter.
There is no cumulative data for gold auctions; however, leading gold loan financier Muthoot Finance Ltd said on an analyst call that it auctioned worth $69 crore in the first quarter, followed by $250 crore for the second quarter.
Manappuram Finance, another gold-focused non-bank lender, said in its analyst call that it auctioned gold worth a fortune. $360 crore in the second quarter. The company said its average book loan-to-value (LTV) ratio was 58%, against a regulatory cap of 75%. LTV of 75% means gold loan $75 should be backed by gold collateral value $100.
Starting in a few weeks
Experts say the auction process and the recalibration of gold lending practices by lenders in line with the Reserve Bank of India’s new guidelines are expected to take several weeks, meaning most of the impact of increased auctions is likely to be felt in the third quarter.
“There have been a lot of regulatory reforms for gold loan NBFCs,” said Jinay Gala, director, India Ratings and Research, adding that gold loan auctions have picked up as NBFCs look to comply with simplified norms. Increase.
“Traditionally, gold financiers used to hold gold as collateral as they took comfort that gold prices were on an upward trend. However, lenders are now ensuring clear and standardized auction policies in line with regulatory guidance, which means they cannot continue to hold on to There is gold,” he added.
The RBI’s revised mandate requires lenders to recalibrate their lending and auction practices to ensure use of third parties for sourcing and appraising loans, valuation of collateralized gold in the presence of customers, adequate due diligence and lack of end-use monitoring Standardized gold loans, transparency in gold ornaments and jewelery auction processes, continuous monitoring of LTV and appropriate application of risk weights.
George Alexander Muthoot, managing director of Muthoot Finance, told Mint that the company always viewed auctions as a last resort. “We prioritize supporting our customers by extending loan repayment periods to ensure they have the opportunity to recover the gold they were promised,” Mutut said.
Muthoot said his company will auction loans only if they turn non-performing assets (NPA), adding that even in such cases, it gives them more time to recover the gold. Muthoot added: “In many cases, this approach can successfully close a loan within three to four months as the customer repays and recovers the asset.”
background
The central bank has been cracking down on gold financiers by banning IIFL Finance Ltd from issuing new gold loans in March 2024. Common concerns include violations of LTV ratios; different auction policies and procedures; and deviations in analyzing and proving the purity and weight of pledged gold when sanctioning loans and auction defaults. The ban on IIFL Finance was lifted on September 19.
In May 2024, the Reserve Bank of India tightened the cash route for gold loans. It is said that gold loan institutions can issue up to $20,000 cash in exchange for pledged gold. For any higher amounts, the money must be deposited into the borrower’s account. In September 2024, it requires them to conduct a thorough review of their policies, processes and practices within three months to identify any gaps and closely monitor the high growth of this segment.
According to the latest data from the Reserve Bank of India, as of October 18, 2024, bank credit for gold jewelry has grown significantly, with an annual increase of 56.2%, compared with 13.1% in the previous year.
The central bank’s instructions come at a time when pressure on gold loans is rising and gold loans are growing strongly.
Loans outstanding within 30 days are labeled as Stage 1 assets, loans due in 30-90 days are labeled as Stage 2 assets, and loans due in more than 90 days are labeled as Stage 3 assets. Muthoot Finance’s third-stage assets rose to 4.3% of outstanding loans in the second quarter, compared with 3.3% at the end of the March quarter and 4% a year ago. For Manappuram Finance, the similar figure for the second quarter was 2.4%, up from 2% at the end of the March quarter and 1.6% in the same period last year.
The impact of lifetime value
For gold loan companies, high LTV usually means higher risk.
“Many non-banking financial institutions used to consider 75% LTV (prescriptive level) as entry LTV, but the Reserve Bank of India clarified that this is exit LTV, which means the principal plus interest cannot exceed 75%. We provide for about 50% The portfolio offers 75% entry LTV,” said the head of a large non-bank lender, who declined to be named.
The admission LTV is the minimum LTV considered based on the principal amount borrowed at the time of loan approval. Exit loan-to-value (Exit LTV) is the maximum loan-to-value (LTV) a lender is required to adhere to during the life of the loan, including principal and interest due
When the Reserve Bank of India took notice of the issue during its annual review, some non-bank financial institutions proposed labeling these loans as non-performing assets, making provisions against them and recovering the funds through the sale of collateral. “However, the RBI has said that you need to reconsider LTV as it is against the guidelines,” he added.
This means that lenders must adopt a lower loan-to-value ratio, making new loan sizes smaller than before (which results in lower note sizes being approved for such loans compared to before). Industry experts say that as customers and employees adapt to the changes, coupled with higher compliance costs required to follow revised regulations, could reduce profitability for gold financiers in the short to medium term.
“Audit checks and risk and balance have been strengthened, all of which require additional manpower and monitoring. As a result, the break-even gold loan AUM of each branch is trending upward.
“So the larger players are seeing more value-led growth, while the smaller players are seeing volume and value growth,” he said.
Demand continues
Despite the ongoing recalibration and some expected slowdown in lending, industry experts expect demand for gold loans to remain strong through 2025, especially given the significant slowdown in the growth of unsecured loans and personal loans .
The steady rise in gold prices and expectations that gold will continue to grow also make now a good time for lenders to auction the precious metal while ensuring high recovery levels.
According to MCX data, spot gold prices are up 12.3% so far in fiscal 2025 and are up 19.5% year-to-date. $As of December 20, 2024, the price is 75,233 per gram. $62,197 per gram a year ago.
CRISIL Ratings said in an October 2024 report that any change in asset classification norms could lead to an increase in reported delinquency levels, including overdue and NPAs. The agency later said the impact on credit losses could be offset by “timely conduct of auctions”, adding that a re-evaluation of business procurement and audit policies is expected to increase operating intensity and lead to slower business growth.
“The gold loan industry in India is experiencing unprecedented growth, with an annual growth rate of 41%. The gold loan market is expected to grow significantly, with the market size expected to be $It will reach US$15 trillion by 2027.