How falling prices may impact the quality of gold loans for banks

The correction in gold prices in recent months is not expected to materially impact the quality of gold loans extended by non-banking financial companies (NBFCs), but for banks the story may unfold differently.
 
Shadow banks have ensured that the loan-to-value (LTV) is maintained below 75 per cent. For banks, however, the incremental LTV was higher at 78-82 per cent, because they were more aggressive in the gold-loan business during the last fiscal. And much of the growth in their books came during the third quarter of this period, when gold prices were soaring.
 
Since June 2020, gold-loans surged even as lending to other segments was affected by asset-quality concerns.
 
In the 11 months through February 2021, such loans grew at over 70 per cent, to Rs 56,000 crore. What also contributed to this growth was the LTV relaxation to 90 per cent for banks by the Reserve Bank of India in August 2020.

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