Assets under management (AUM) of non-banking financial companies (NBFCs), which primarily offer loans against gold, is expected to rise 18-20% to Rs 1.3 lakh crore this fiscal. This would be despite a contraction in the first quarter, when the pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.
"Demand for gold loans from micro enterprises and individuals - to fund working capital and personal requirements, respectively - has increased with the pick-up in economic activity and the onset of the festive season, which coincides with the easing of lockdown restrictions by several states," the brokerage has said.
Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, "Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter. We expect the momentum to continue for the rest of this fiscal. Gold loans will continue to be a sought-after asset class, while lenders would remain cautious about growth in many other retail asset classes."
From a credit perspective, gold loans are a highly secured and liquid asset class that generates superior returns with minimal credit losses. Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic.
Historically, gold-loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection (which keeps the loan-to-value, or LTV, under check) and timely auctions of gold.
Says Ajit Velonie, Director, CRISIL Ratings, "Gold-loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check. Besides ensuring periodic interest collection, they do not flinch from conducting auctions when required - which rose sharply in March and April 2021 - to avert potential asset-quality challenges."