Rating Agencies Don't See Major Uptick In Gold Loan Credit Losses

A day after the Reserve Bank of India cautioned lenders on irregular gold loan practices and asked to closely monitor the growth in this segment, rating agencies said that they don't expect a major uptick in credit losses in these loans.

While the central bank's concerns are valid and compliance must be adhered to, rating agencies believe that it may not have a material impact on the overall banking sector as the gold loan portfolio does not constitute a significant part of it.

Late on Monday, the RBI  said that it has found that select supervised entities are exercising several irregular practices in granting loans against pledges of gold ornaments and jewellery.

The major deficiencies include shortcomings in the use of third parties for sourcing and appraisal of loans, valuation of gold without the presence of the customer, inadequate due diligence, lack of end-use monitoring of gold loans and weakness in loan-to-value ratios.

RBI has also asked lenders to submit an action report to the senior supervisory manager of the central bank within three months.

However, rating agencies remain positive on the space as it is witnessing healthy loan growth and asset quality has been satisfactory.

CRISIL Ratings expects a healthy growth rate of around 16–18% in terms of assets under management in the current financial year, Krishnan Sitaraman, senior director and chief ratings officer, said in a webinar.

This expectation underscores the elevated gold prices and because traditional gold loan financiers are able to manage the asset quality and risk-adjusted returns well.

"I don’t expect a decline in the asset quality of gold loans. Most of the traditional players are managing the risks well. Even though there are short-term delinquencies, credit losses are quite negligible," he said.

Within retail credit, loans against gold jewellery clocked a growth of 41% year-on-year in August as compared with over 20% in the same period a year ago, the latest RBI data showed. As of August, outstanding gold loans in the system were Rs 1.40 lakh crore as against overall banking credit of Rs 169 lakh crore.

ICRA Ratings also echoed a similar view and said that the impact on profitability and asset quality of lenders will depend on their portfolio mix. While the rating agency is positive on the space, going forward, it expects some reduction in their estimates with RBI's interventions.

Apart from gold loans, rating agencies also said that the asset quality in the unsecured retail segment has been improving.

While delinquencies are seen and are expected to rise in the credit card and microfinance institution book, on the entire unsecured segment, CRISIL Ratings does not expect them to increase.

Sitaraman expects the non-performing assets of banks' unsecured loan segment to rise to 2–2.50% in the current financial year from 1.5%.

On the rise in the MFI loan growth, he expects credit costs to rise to 3.5% in the financial year 2024–25 from 2% in FY24 on the back of high delinquencies.

CRISIL Ratings expects banks' asset quality to touch a fresh decadal low of 2.5% in FY25, while ICRA Ratings expects to monitor it closely amid concerns around overleveraging by retail borrowers, high retail unsecured loans, and moderation in credit growth.

"The seasoning of the loan book amid high growth in loan book post-Covid will also result in higher pressure on asset quality. With moderating the pace of recoveries and upgrades, this is expected to translate into higher credit costs for lenders," ICRA Ratings said in a press release.

CRISIL Ratings expects banks' credit growth to remain healthy at 14% this year, despite a dip from 16% in FY24. While net interest margins are set to compress 10–20 basis points this fiscal, lower credit costs will support banks' profitability, it said.