New Delhi: Full-page advertisements for auction of gold jewellery by leading financial institutions operating in the segment have become a common sight in Indian newspapers over the last few months, indicating severe economic distress faced by Indian households.
Loans against gold jewellery, typically considered to be the last resort used by many households and small businesses facing severe fund crunch, saw a sharp increase during the Covid-19 pandemic as many households suffered loss of jobs and livelihoods.
But the inability of the borrowers to repay the loans is leading to a surge in auction of gold jewellery, industry experts said.
Most of these households haven’t been able to recover their lost livelihoods to repay their loans and reclaim their jewellery from the financial institutions, they pointed out.
What companies are doing
Manappuram Finance, a leading non-banking finance company in the gold loan segment, auctioned gold worth Rs 404 crore in the January-March period as against a total auction of only Rs 8 crore in the April-December 2020 period.
The rise in auctions coincided with the sharp fall in gold prices that started around January.
“We had an auction of around 1 tonne this year. Compared to normal situations, this 1 tonne auction across all of our branches is pretty high,” V.P. Nandakumar, managing director and chief executive officer of Manappuram Finance, said in a conference call with analysts after the declaration of its full-year results in May.
He explained that the cash flow of the customers has been badly hit, adding that the borrowers of the company are mainly “from the bottom of the pyramid” comprising daily wage earners, small time entrepreneurs, self-employed people and small farmers.
Gold prices had peaked at Rs 57,000 per 10 grams in August last year before crashing to around Rs 45,500 as of end-March. This meant the value of the collateral held by financial institutions went down prompting auctions in case of default in repayment.
However, gold prices have now recovered and are trading around Rs 48,000-Rs 49,000 per 10g now.
IIFL Finance, another company in the gold loan segment, saw its auction to loan book ratio rising to 1.8 per cent in the January-March quarter as compared to 0.23 per cent in the quarter ended December, and 0.04 per cent in the September quarter. This ratio indicates the auctions done as a percentage of the loan book.
“Across industry, auctions are likely to be lower in Q1 of 2021-22 compared to Q4 of 2020-21 but higher than the auctions seen in the April-December 2020 period,” said Saurabh Kumar, head, Gold Loans at IIFL Finance.
“Two main factors will determine the course of auctions in the coming months. Gold prices have firmed up and they will provide some relief to lenders. On the other hand, branches of most lenders were open with limited operating hours for 40-45 days due to the second wave. Movement of people was also restricted. This may mean relatively lesser collection of the loan repayment,” he added, pointing out that gold demand is returning as businesses unlock across the country.
Big losses unlikely
Typically, in case of a default in repayment, customers are first given sufficient notice to repay. In case they fail to repay the loan, the gold is auctioned away by the financial institutions.
Industry experts pointed out that most of these firms didn’t conduct any auction in the first half of the last fiscal as they wanted to give the borrowers more time for repayments, taking into account the pandemic.
Additionally, the rising gold prices at the time provided a sufficient cushion for the financial institutions. But this cushion reduced as gold prices started falling.
“We have seen an increase in auctions by gold loan NBFCs. This on account of the combined effect of gold price fall and challenges on repayments faced by borrowers due to the economic stress from the pandemic,” said Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil Ratings.
He said with the recent trend of increase in gold prices continuing, the rate of auctions may come down going forward, adding that any significant credit losses for NBFCs is unlikely.
This is because these firms typically give a loan that is less than 75 per cent of the value of the gold jewellery, also known as the loan-to-value ratio. “The price fall that we have seen so far has not been enough to make the value of the collateral lower than the loan outstanding,” he said.
However, Muthoot Finance, a leading company in the segment, said it doesn’t favour auctioning of gold and has tried to keep it at a bare minimum.
In a call with investors earlier this month, after the announcement of the full-year results, the company’s managing director George Alexander Muthoot said his firm has auctioned only Rs 170 crore of gold in the full-year, less than 1 per cent of the total book size of Rs 52,000 crore.