Delayed Recognition Of Bad Loans
A smaller factor in the bunching up of auction of gold collateral is the delay in recognition of bad loans, bankers told BloombergQuint.
A Supreme Court interim order had prevented banks from tagging accounts as non-performing after August 31. The order has now been lifted. In the interim, while banks were putting out data on pro forma non-performing assets for accounting purposes, they were not initiating recovery proceedings against individual accounts, BloombergQuint had reported earlier.
Therefore, gold auctions for those borrowers who defaulted on their loans last year will also happen now, partly explaining the sudden rise in auctions.
Banks Vs. NBFCs
The auctions of gold collateral are coming more from banks than from non-banks. One reason for this is that the higher loan-to-value ratio was permitted only for banks. Besides, non-bank lenders tend to give shorter tenure loans, leaving them less exposed to price volatility.
The rise in gold auctions is likely more among banks than specialised gold financers that give shorter tenure loans, said Siji Phillip, senior analyst at Axis Securities. “Banks give gold loans for relatively longer tenures of up to a year compared to specialised NBFCs that usually give short-term loans of up to three months,” she said. “Therefore, the ability to recover gold loans is higher for NBFCs than banks.”
As these defaults get recognised on bank’s books, combined with the impact of lower LTV cap becoming applicable from April, banks are likely to be more affected than the NBFCs, she said. “The concern is bigger for those banks that gave more loans at higher LTV ratios.”
“All in all, if the pandemic situation fails to improve, we are likely to see gold auctions inching up for most lenders, especially banks,” she said. “Therefore, keeping a tight leash on collection efficiencies and default rates will remain very important.”
An e-mail query sent to Muthoot Finance Ltd. did not elicit a reply, while Manappuram Finance Ltd. declined to comment, citing silent period ahead of their fourth quarter results announcement. Both are gold loan-focused NBFCs.