Banks, NBFCs see pressure on gold loan business as prices turn volatile

Even though prices have started picking up, banks continue to remain a little cautious about growing the book because of the volatility gold has seen in the last couple of years

As gold loan prices become volatile, lenders have become wary of growing the gold loan portfolio. The slide in the yellow metal prices in the last year and the fluctuations have led to the banks and Non Banking Financial Companies adopt a cautious approach towards growing their book.

Last calendar year, gold prices declined by 6.5 per cent, the year prior to that saw the yellow metal slide by 8.6 per cent. Even though the prices have started picking up, banks continue to remain a little cautious about growing the book because of the volatility gold has seen in the last couple of years, say bankers.

 

Another banker explains that the gold loan renewals by customers have also come down. This is because when gold prices fall, the value of gold with the bank (against which loans have been given) also declines. Therefore, customers fear that if the prices are not stable then they may be ask by their lender to pre-pay a certain amount. The Reserve Bank of India (RBI) has mandated the ratio at 75 per cent; if prices fall, then at times lenders are at the risk of exceeding the limit.

"Gold prices have led to customers getting a little cautious about loans. Customers do get a little wary as the prices have been fluctuating as they are worried that they may get a call from their bank if the valuations go down. The industry itself is de-growing it and the overall growth has been weak," said Arvind Kapil, senior executive vice-president (unsecured loans, home and mortgage loans), HDFC Bank.

If the value of the gold falls, then, lenders give a week's time to pay the extra amount which can be extended depending on the loan amount and the customer. But despite this, if a customer failed to pay, the gold is auctioned by the lender.

Another reason which has led to a sluggish growth in the gold loan business is the insufficient rainfall. "With monsoon being weaker than expected, the rural economy is under stress. As a result the cash flow has been restricted which has led to slower growth in credit offtake and overall gold loan book," said Kapil Krishan, Chief Financial Officer, Manappuram Finance.