What could be seen as rising stress in the household finance, non-performing assets (NPA) pertaining to gold loans increased over 21 per cent for scheduled commercial banks (SCBs), a reply by Finance Ministry in the Lok Sabha on Monday showed. Another reply highlighted that per capita household liability is also on the rise.
NPA is referred to an account where borrowers defaulted in three successive equated monthly instalments (EMI).
“The gross non-performing assets (GNPAs) pertaining to gold loan in scheduled commercial banks (SCBs) and upper and middle-layer non-banking financial companies (NBFCs) have increased by 18.14 per cent from March 2024 to June 2024, and the gross GNPAs pertaining to gold loan in SCBs have increased by 21.03 per cent,” Finance Minister Nirmala Sitharaman said in a written reply in the Lok Sabha. As on June 30, 2024, gross NPA ratio pertaining to gold loans in SCBs was 0.22 per cent and that of upper layer and middle layer NBFCs was 2.58 per cent.
Organised market
According to ICRA, the organised gold loan market, comprising banks and non-banking financial companies, is set to cross the ₹10-lakh-crore mark in the current fiscal from ₹9.2 lakh crore in FY24 and touch ₹15 lakh crore by March 2027.
Sitharaman said a number of steps have been taken by the government and the Reserve Bank of India to mitigate the risks of NPAs in the gold loans. For example, the Financial Services Department, last year advised public sector banks (PSBs) to conduct a comprehensive review, including assessment and assaying of collateral, analysis of interest and other charges collected from borrowers, etc., of entire gold loan portfolio sanctioned/disbursed during the period from January 1, 2022 to March 31, 2024. This was to ensure that gold loans disbursed by banks adhered to regulatory requirements and internal policies of the bank.
Similarly, RBI, advised supervised entities (SEs) to comprehensively review their policies, processes and practices on gold loans to identify gaps, and initiate appropriate remedial measures in a time-bound manner. They were also advised to closely monitor their gold loan portfolio and ensure that adequate controls are in place over outsourced activities and third-party service providers. “To safeguard lenders against risks such as gold price fluctuations, valuation errors, etc., as per the extant RBI instructions, regulated entities including banks and NBFCs are not permitted to extend loans exceeding 75 per cent of the value of gold ornaments and jewellery,” Sitharaman said.
LTV RATIO
This loan-to-value (LTV) ratio of 75 per cent is required to be maintained throughout the tenure of the loan. For loans where both interest and principal are due for payment at maturity of the loan (bullet repayment loans), banks are not permitted to extend loans exceeding tenure of 12 months from the date of sanction so as to reduce the risk of loan defaults.
Further, “to support the small borrowers, the aforesaid LTV ratio is not applicable to loans extended by SCBs for agriculture purpose, and in terms of RBI guidelines, lenders are permitted to make cash disbursement up to ₹20,000 in case of gold loans,” the Minister said.
