Rating agency India Ratings today said falling gold prices, if sustained, could significantly impair the asset quality of the gold loan portfolios of non-banking finance companies (NBFCs) and banks. It said the impact of the sharp fall in recent weeks could be absorbed by high profitability but more softening of domestic prices would make a larger part of the portfolio vulnerable. Companies with significant exposure to gold loans could, thus, be impacted severely.
Muthoot Finance and Manappuram Finance are two large NBFCs which give loans against gold. Some South India-based lenders such as Indian Overseas Bank and Indian Bank also have a significant gold loan portfolio. In such debt, the loan to value (LTV) ratios are high, due to intense competition to gain market share, said India Ratings.
Though the Reserve Bank of India had capped the LTV for gold loans at 60 per cent of the value, liberal interpretation of the LTV (including making charges) had moved it to over 80 per cent in some cases, it said.
High LTVs, with largely bullet repayment structures (principal and interest paid together) in the sector, leave limited cushion for a correction in the value of security, it said. By its own assessment, a sizable proportion of gold loan dues (principal + accrued interest) might already be close to the realisable value of the collateral and further accrual of interest on these.
Recently Manappuram Finance had declared falling gold prices would mean it faced reversals of interest and it would book a one-time quarterly loss in the fourth quarter of 2012-13.
A further 10 per cent correction in gold prices in the near future could result in a majority of loan amounts due being higher than the realisable value of collaterals, resulting in increased possibility of losses, said India Ratings. It said the impact of falling gold prices could be felt across the sector. Gold loan NBFCs were more vulnerable than banks, despite similar LTVs at the time of disbursal.
Among the banks, South India-based private sector banks are likely to be more impacted, primarily due to the higher proportion of gold loans in their books, said Prakash Agarwal, associate director (banks) at India Ratings, in a note. He said the agency was reviewing the gold loan portfolios of rated banks and NBFCs, to evaluate the impact on the fall in gold prices on profitability.
Gold loan NBFCs could also see pressure on business growth, as banks will become cautious in lending to them, creating liquidity pressures if the fall in gold prices is sustained, he said. However if gold prices bounce back in a short period, these concerns might not materialise, said India Ratings.
The current slide has exposed the vulnerability of loan portfolios, disbursed primarily on the basis of collateral values, with limited consideration for underlying cash flows, the rating agency added. "For such portfolios, the ability to liquidate collateral in a timely and profitable manner remains of primary importance," it said.