Gold loan boom brings early stress signals for NBFCs

Mumbai: After two years of a golden run, India's gold loan market could be showing signs of strain. With the precious metal's prices retreating and households taking on more debt, some of the country's leading non-bank lenders are flagging early repayment troubles, raising concerns about the risks building up in one of the fastest-growing lending segments.Bajaj Finance and Piramal Finance, major players in the non-banking finance space, flagged risks linked to borrowers’ repayment behaviour in the second quarter of the current fiscal year.

While Bajaj has seen stress in asset quality from short-tenure gold loans, Piramal Finance warned that a significant share of industry disbursements has gone to borrowers with a history of serious delinquencies.Major traditional gold financiers—Muthoot Finance and Manappuram Finance—have not yet declared their quarterly results yet.Bajaj Finance’s stage-2 and -3 assets rose by ₹1,601 crore in the September quarter, of which ₹1,047 crore came from gold loans.

Stage-2 assets represent loans where credit risk has risen, but which have not yet become non-performing, while stage-3 are those with serious repayment issues.This was partly driven by short-tenure gold loans that required borrowers to visit branches every three months for repayment or rollover. Bajaj discontinued these in August and is shifting towards longer-tenure loans. “A short-term loan doesn’t work for the customer, doesn’t work for the company, and is not sustainable,” managing director Rajeev Jain said at the earnings call on Monday.Despite the stress, Bajaj Finance does not expect the transitional increase in stage-2 gold loans to affect credit costs.

Adjusting for the transient movement in gold loans, its stage-2 and -3 assets sequentially improved to 1.88% of total in the September quarter from 1.90%.Appetite stays robustAs a result, lenders' appetite to grow the portfolio remains strong despite the early warning signs.“...shorter-tenure loans tend to show overdue accounts and delinquencies sooner than longer-tenure products, potentially accelerating the recognition of stress,” Siddharth Goel, director at Fitch Ratings said.

“Eventually, the credit cost part of it will not be meaningful, given the LTVs,” he said, referring to loan-to-value ratios that measure the loan amount against the value of the pledged gold.Typically, sharp fluctuations in gold prices can disrupt portfolio LTVs as lenders rush to recalibrate their exposures. Easing gold prices can force lenders to cut exposures quickly, leading to stretched LTVs and sudden inability of borrowers to repay part of their loans.Goel, however, cautioned that lenders could still face higher provisioning or auction activity as delinquent loans accumulate.IIFL Finance’s bad loans rose to 0.9% in Q2 from 0.6% in the previous quarter and a 0.1% a year ago, and Fedbank Financial Services' stage-3 assets rose to 0.5% from 0.1% a quarter ago and 0.4% a year ago.“As far as the gold piece is concerned, stage-2 is technical in nature… So, this will not translate into a credit cost.

It’s only technical in nature.” the Fedbank Financial management said. The lender attributed the movement to changes in gold lending practices and customer repayment behaviour following regulatory changes from April. Management said the rise in stage-2 gold loan assets was technical in nature, and it is not expected to translate into higher credit costs.Risky borrowersMeanwhile, Piramal Finance flagged a significant proportion of gold loan disbursements are going to borrowers who have earlier experienced serious repayment stress.“Depending on how you count, on a gross disbursement basis, anywhere from 15-23% of gross disbursements of gold loans over the last year have happened to customers who are 90 days-plus past due at least once in their lifetime,” managing director Jairam Sridharan said in a post earnings call on Monday.

“It’s a shockingly high number,” he said.Piramal Finance said it does not lend to customers who are already more than 90 days past due, with such borrowers accounting for less than 1% of its gold loan disbursements in October so far. For the September quarter, its gross non-performing assets ratio was unchanged on quarter at 2.4% and lower than 2.6% a year ago.Another concerning trend is the rise in multiple borrowing by one individual.

Piramal's management indicated that the proportion of customers with gold loans apart from their primary lender had risen to 35%, from 20-25% two years ago.For Bajaj Finance, the focus extends beyond gold loans. The company plans to reduce the share of new loan originations to customers with three or more lending relationships to 3.5% by March 2027, from 7% currently.The concerns come as gold lending has expanded rapidly, partly amid tighter scrutiny of unsecured credit by the Reserve Bank of India in November 2023.

Gold loans have since emerged as an important growth avenue for lenders, shifting from unsecured to secured credit products.As of August end, NBFCs’ loans given against jewellery have jumped 69% from a year ago to ₹3.64 trillion. For banks, this number has risen 83% to ₹5.59 trillion, latest RBI data showed.“The strong growth in gold loans over the past two years has been supported by a sustained rise in gold prices, which enabled borrowers to enhance their borrowing through top-ups against existing pledges," Prakash Agarwal, partner at Gefion Capital said.

"However, many borrowers may have already maxed out loans on the gold pledge and could face challenges in servicing or repaying their loans, especially where repayment is bullet-structured and maturities are approaching.”New players' hassleAgarwal said these concerns being raised by some NBFCs, especially those less established in gold loans, over signs of pressure in the gold loan segment are not surprising, given the correction in gold prices over the past seven to eight months.Since the start of fiscal year in April, gold prices in India have fal…