High yielding advances against gold jewellery, once the hottest loan product for banks, have turned sour this year as collections are affected due to the lockdown in the first quarter. Kerala-based Federal Bank and CSB Bank, besides large private sector lenders such as ICICI Bank, have seen slippages increase from this portfolio.
Although lenders say the pain is transitory, the second quarter is crucial for this portfolio to not become a big source of NPAs.
Banks for which gold loans contribute substantial amount to their profits, were hit in the first quarter. Out of the Rs 640 crore slippages that Federal Bank saw during the quarter, Rs 86 crore was from gold loans or linked to the product as a result, the bank’s gross NPAs rose to 3.50% of advances, up from 2.96% a year.
Similarly, Federal Bank’s smaller peer CSB Bank’s gross NPAs rose to 4.88% in June 2021 from 3.51% a year earlier due to the rise in NPAs from the gold loan business. Out of the Rs 435 crore of new NPAs during the quarter, Rs 361 crore was from gold loans including reversal of interest for the bank where gold loan makes up 38% of its assets.
Gold loans were the pain point even for larger lenders like ICICI which reported fresh slippages of Rs 6773 crore from its retail book out of which Rs 1123 crore were from such loans.
Analysts said the rise in delinquencies reflects the challenges banks faced in loan collections and also the cash flows issues faced by gold loan borrowers most of whom are micro entrepreneurs.
“There is also the impact of the fall in gold prices since last year which has made lending a little more risky. The fall in gold prices means that the strong growth that we saw in this portfolio last fiscal may slow down this year as banks will be more cautious,” said Prakash Agarwal, head financial institutions at India Ratings & Research.
Gold prices have fallen from a peak of Rs 52,827 per 10 grams in August 2020 to Rs 47,640 per grams now, though it is higher than the Rs 44,739 per 10 grams reported in March 2021. The rise in gold prices had also prompted the Reserve Bank of India to increase the loan to value ratio (LTV) to 90% from 75% in August. The LTV has since been restored to 75% from April.
Bankers however said despite the recent hiccups gold loans continue to be a well performing portfolio which can be built over the long term.
“We still believe in this portfolio and will continue to build it. There is no need for any caution. We are confident that as things improve both demand for loans and recovery of will improve. Already we are seeing an increase in recovery and we continue to expect growth in this fiscal year,” said CVR Rajendran, CEO at CSB Bank.
The growth though is going to be slower than the 61% growth the bank recorded in the fiscal ended March 2021. The banking system itself had recorded a 82% growth in fiscal 2021.
Bankers said the high yields and low risk offered by gold loans make it a winning product. CSB Bank for got a 11.50% quarterly yield in March 2021.
“In good times or bad gold loans are always a good product to have. Out NPAs in the segment is 0.20% which is very low with average loan to value (LTV) of about 80%. The loans at LTV of 93% are in single digits; so it is a very small portion,” said Shyam Srinivasan, CEO at Federal Bank.