Gold loan boom brings early stress signals for NBFCs | Today’s news

Mumbai: After two years of a gold run, India’s gold lending market may be showing signs of strain. As precious metal prices recede and households take on more debt, some of the country’s top non-bank lenders are reporting prepayment problems, raising concerns about risks emerging in one of the fastest-growing credit segments.

Bajaj Finance and Piramal Finance, major players in the non-banking finance space, have flagged the risks associated with repaying borrowers in the second quarter of the current fiscal. While Bajaj saw pressure on asset quality from short-term gold loans, Piramal Finance warned that a significant portion of disbursements in the industry went to borrowers with a history of serious delinquency.

Major traditional gold financiers — Muthoot Finance and Manappuram Finance — have yet to report their quarterly results.

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Bajaj Finance Phase 2 and 3 assets increased ₹1,601 crore in September, of which ₹1,047 crores came from gold loans. Stage 2 assets represent loans that have increased credit risk but have not yet become non-performing, while Stage 3 are loans with serious repayment problems.

This was partly due to short-term gold loans that required borrowers to visit branches every three months for repayment or renewal. Bajaj discontinued them in August and is moving to loans with longer maturities. “Short-term lending doesn’t work for the customer, it doesn’t work for the company and it’s not sustainable,” CEO Rajeev Jain said on Monday’s earnings call.

Despite the stress, Bajaj Finance does not expect the transitory increase in gold loans in Phase 2 to impact credit costs. Adjusted for the transitory movement of gold loans, Phase 2 and -3 assets gradually improved to 1.88% of the total in the September quarter from 1.90%.

Appetite remains strong

As a result, lenders’ appetite to expand portfolios remains strong despite early warning signs.

“…loans with shorter maturities tend to show delinquencies and delinquencies earlier than products with longer maturities, potentially accelerating the recognition of stress,” said Siddharth Goel, director of Fitch Ratings. “Eventually, some of the cost of credit will not make sense with respect to LTV,” he said, referring to loan-to-value ratios, which measure the amount of the loan against the value of the gold pledged.

Sharp swings in gold prices can typically disrupt portfolio LTVs as lenders rush to recalibrate their exposures. Freezing gold prices can force lenders to quickly reduce exposure, leading to a stretch in LTVs and the sudden inability of borrowers to repay some of their loans.

But Goel warned that lenders may still face higher provisioning or auction activity as bad loans pile up.

IIFL Finance’s bad loans rose to 0.9% in Q2 from 0.6% in the previous quarter and 0.1% a year ago, and Fedbank Financial Services’ Phase 3 assets rose to 0.5% from 0.1% a quarter ago and 0.4% a year ago.

“For gold, Phase 2 is technical in nature… So it’s not reflected in credit costs. It’s just technical in nature.” Fedbank financial management said. The lender attributed the move to changes in gold lending practices and customer repayment behavior following regulatory changes in April. Management said the increase in loan assets in Phase 2 was technical in nature and is not expected to translate into higher credit costs.

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Risky borrowers

Meanwhile, Piramal Finance said a significant portion of disbursed gold loans are to borrowers who have previously experienced severe repayment stress.

“Depending on how you calculate it, on a gross disbursement basis, anywhere from 15 to 23% of the gross disbursements of gold loans over the past year have been to customers who are 90 or more days past due at least once in their lifetime,” CEO Jairam Sridharan said Monday in an earnings call on Monday. “It’s a surprisingly high number,” he said.

Piramal Finance said it does not lend to customers who are more than 90 days past due, with these borrowers accounting for less than 1% of its gold loans so far in October. For the September quarter, the gross non-performing asset ratio was unchanged quarter-on-quarter at 2.4%, down from 2.6% a year ago.

Another worrying trend is the increase in multiple borrowings from one individual. Piramal management said the share of customers with loans in gold other than their primary lender has grown 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 newly granted loans to customers with three or more credit relationships to 3.5% from the current 7% by March 2027.

The concerns come as gold lending has expanded rapidly, partly as a result of the Reserve Bank of India tightening unsecured lending controls in November 2023. Gold lending has since emerged as an important growth avenue for lenders, which have shifted from unsecured to secured lending products.

By the end of August, NBFC loans for jewelery rose 69% over the previous year to ₹3.64 trillion. For banks, this number increased by 83%. ₹5.59 trillion, the latest RBI data showed.

“The strong growth in gold loans over the past two years has been fueled by a sustained rise in gold prices, which has enabled borrowers to increase their loans by increasing existing collateral,” said Prakash Agarwal, partner at Gefion Capital. “However, many borrowers may have already exhausted their gold collateral loans and could face problems in servicing or repaying their loans, particularly where repayment is spherical and maturities are approaching.”

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Difficulty with new players

Agarwal said those concerns have been raised by some NBFCs, especially those less established in gold lending, are not surprised by the signs of pressure in the gold lending segment, given the correction in gold prices over the last seven to eight months.

Since the start of the fiscal year in April, gold prices in India have declined by 3% compared to the 65% gain seen in FY26.

Fitch’s Goel also pointed to an operational challenge for new entrants. Established players such as Muthoot Finance and Manappuram Finance have years of experience in managing bad loans and auctioning pledged gold. Newer players may need time to develop similar abilities. Newer entrants find portfolio operations “more fraught with hassle,” he said.

Piramal Finance entered the gold loan business earlier this year, while Bajaj Finance defunct in 2016.