Behind the glitter
The surge in gold loans and the sharp uptick in auctions may be hiding a larger pain, reports Raghu Mohan
The surge in gold loans and the sharp uptick in auctions may be hiding a larger pain, reports
George Alexander Muthoot, the managing director of Muthoot Finance, is of the view that his company knows the business of lending against gold better than most: “We work closely with our customers and understand their needs better. I have not seen signs of stress in our business.” What he will not say explicitly is that this may not hold true for banks.
He limits himself to a cryptic, “We do it better than them.”
And therein lies a tale.
Gold loans have surged nearly 85 per cent over the past year, to ~60,464 crore. The trigger is the Covid-19 pandemic, with folks pledging jewellery. Small firms have also tapped this route to make up their cash needs and, possibly, even working capital — from both formal and informal lenders.
The outlier growth in gold loans compared to any other segment was also aided by the Reserve Bank of India’s (RBI’S) move to hike the loan-to-value (LTV) ratio for such loans from 75 per cent to 90 per cent.
All this has created another set of issues: Many will not be able to redeem the gold, leaving them without a safety set. The gems and jewellery sector is also in the dumps, and has sought a moratorium on interest payments. In effect, vendors of gold loans may soon see stress from both the retail and wholesale part of the game.
Things have come to such a pass that, with limits being hit on gold LTVS, there is a flight to informal sources of finance. (Some 65 per cent of the gold-loan market is accounted for by the unorganised sector.)
Red lights flashing
Take a look at the gold auctions. Mannapuram Finance had auctioned ~8 crore worth of the yellow metal in the first three quarters of FY21. This shot up to ~404 crore in the fourth quarter and further to ~1,500 crore in the June quarter.
Granular data on gold auctions across players are not available in the public domain, and banks hardly ever disclose whether they opt for this route at all. It is entirely possible that those who have availed of gold loans may also have taken other loan exposures. These, too, may come under pressure. Worse, as lenders — be it banks or non-banking financial companies — never reveal segmented non-performing asset data, there is no way of knowing the extent of pain, sector-wise. And not many are ready to go on record, given the sensitivities involved.
As on date, less than 15 per cent of household savings in gold is leveraged at any point of time for a short-term loan to tide over emergencies — whether personal, medical or business-related. Usually, in times of economic stress, utilisation of household savings in gold for loans increases by 20-25 per cent.
“When households were under financial stress due to the lockdown on account of the pandemic, it was the gold savings, primarily saved by the lady of the household over the years, which came to the rescue of the entire family,” says Sanjeev Agarwal, managing director of Dvara Smartgold.
Look at the issue of gold auctions from a different perspective. “About 80 per cent of the loan against gold jewellery is taken for a period of less than six months. And hence, the margin requirement of 25 per cent of value is more than sufficient to cover the interest costs due from the borrower,” adds Aggarwal.
However, the situation is very different this time. Households that had to borrow against gold jewellery during the first wave of the Covid pandemic have not been able to fully repay their loans because of income
“We work closely with our customers and understand their needs better. I have not seen signs of stress in our business”
GEORGE ALEXANDER MUTHOOT Managing Director, Muthoot Finance
“The underlying momentum will support a sharp spike in demand for gold once normalcy is restored” SOMSUNDARAM P R
Regional Chief Executive Officer, India World Gold Council
“The margin requirement of 25 per cent of value is more than sufficient to cover dues from the borrower” SANJEEV AGARWAL
Managing Director, Dvara Smartgold
losses on account of the second wave. These customers were forced to roll over their existing gold loans along with part of the interest due, because of which the security margin available got reduced.
The drop of 5-7 per cent in gold prices after March 2021 has added to borrowers’ woes, triggering margin calls and auctioning off of jewellery pledged by customers. And that is the expected trend line in gold prices.
Overall, gold demand in India in the first half of 2021 was 216.1 tonnes, up 30 per cent over the corresponding period of 2020. “Though it is still a multi-year low, it reflects an underlying demand momentum that will likely support a sharp spike in demand once normalcy is restored on the Covid front,” notes Somasundaram
P R, regional chief executive officer, India, World Gold Council.
He adds that the outlook for the second half of 2021 is yet uncertain, with consumer confidence and business response subject to the impact of the looming threat of a third wave of Covid and the pace of economic recovery. “One comforting view is that, given the pace of vaccination and the sero survey results, we may learn to live with Covid, ensuring that businesses and sales become more resilient,” he points out.
Yet, analysts suggest that the next few quarters may throw up surprises.