The Curious Case Of Shriram Finance's Gold Loans

The September quarter earnings call of Shriram Finance has left many to re-evaluate their understanding of the loan-to-value assessment and classification of bad loans in gold loans, three people told NDTV Profit.

"The moment it (gold loan) breaches the 75% LTV norm, we are actually classifying it as an NPA," Managing Director YS Chakravarti said on the call.

The Reserve Bank of India has mandated that lenders maintain an LTV of 75% throughout the tenure of the loan extended against pledge of gold ornaments and jewellery for non-agricultural end uses. However, the regulator does not call for any asset classification downgrade, in case of LTV breaches.

The LTV ratio shall be computed against the total outstanding in the account, including accrued interest, and current value of gold jewellery accepted as security, the RBI said.

"The management would have just red flagged the account or considered it as an NPA for the purpose of internal use. It's called discretionary provision in accounting," Asutosh K Mishra, head of research - institutional equity at Ashika Stock Broking Ltd, said.

What is surprising is that the company has said they have had NPAs at a time when gold prices have moved up substantially. Typically, this would have led to better alignment of LTVs.

As on Sept. 30, Shriram Finance had a gold book of Rs 6,080 crore, translating into 2.5% of its overall assets under management of Rs 2.43 lakh crore. The portfolio fell 0.7% sequentially.

Explaining the reason behind the fall in Shriram Finance's gold loan book on a sequential basis, Chakravarti said that the company had cut its LTV ratio to 60-65% from 70-73%, leading to lower disbursements.

"See, basically, your exit LTV, the norm is 75% of the loan to value of the gold. That is an exit LTV that is prescribed, not entry. So your accumulated interest plus principal cannot cross 75%," he said.

In order to understand the disconnect here, it is important to note that NBFCs generally assess LTV ratio of a gold loan at the time of onboarding a customer and not at the time of exit, a person said.

In the case of a breach, lenders can go ahead and auction the gold. But if somebody is servicing the loan on a regular basis, it cannot be classified as an NPA, the person said, adding that this particular phenomenon has not been witnessed in any other company so far.

According to one of the three people quoted above, this looks like a case of overleveraging as when the price of gold goes up, the company lends more money.

In terms of segment wise NPA breakup, gross stage 3 assets of Shriram Finance's gold loan book were 1.95% for the quarter ended September against 1.94% a quarter ago and 1.87% a year ago.

Net stage 3 assets were 1.79% from 1.80% a quarter ago and 1.72% from a year ago.

This has come as the RBI in a circular last month advised lenders to review their policies, processes and practices in granting loans against pledge of gold ornaments. The regulator conducted a review of how lenders adhere to its norms.

Among the major deficiencies that RBI found were, shortcomings in use of third parties for sourcing and appraisal of loans, inadequate due diligence and lack of end use monitoring of gold loans, weaknesses in monitoring of LTV.