Gold loan win-win but involve social issues

 

GOLD LOANS: WIN-WIN BUT BEWARE OF SOCIAL ISSUES

 Growth Story: Though Gross Bank Credit growth is muted at 5.7% for FY 2020-21, due to uncertainty thrown by COVID and related lock downs, there are some segments like wholesale trade, agriculture, housing loans, vehicle loans, unsecured loans and gold loans that have posted two digit growth. In particular, the growth in gold loans, both under agriculture and personal segment, is impressive. While the gold loan portfolio of the banking system grew by 33.9% (from a level of Rs.24866 cr. as on 31.03.2019 to Rs.33,303 cr. as on 31.03.2020) in FY 2019-20, it grew by a whopping 81.6% in 2020-21 to reach a level of Rs.60,464 cr. as on 31.03.2021. It is understood that a majority of the growth in agriculture also came through sanction of gold loans extended to agriculturists. The largest bank in terms of business, SBI has posted a growth of 465% y-o-y under gold loan portfolio (the loan outstanding went up from Rs.3,715 Cr. in March 2020 to Rs.20,987 cr. in March 2021). Likewise, Kerala based banks like Federal Bank and CSB recorded a growth of 70 and 61 percent respectively under gold loans for FY 2020-21, Many of the PSBs and old generation PvBs have also expanded their gold loan exposure considerably.

Major factors that contributed to the growth in gold loans are

(i)       Higher availability of loan per gram of gold (increase in gold price plus higher LTV(loan to value ratio) from 75% to 90%),

(ii)             Willingness of the bankers to extend gold loans at cheaper rates and

(iii)   The borrower’s dire need to raise money for meeting their daily liquidity   mismatches.

 It is a win-win for both the banker and the customer:

ü  The comfort for the banker is he need not raise any fresh capital, since gold is a eligible cash collateral, the loan is well secured and in case of stress, the money lent can be realised through auction without intervention of the court.

ü  From the customer’s point of view, ready availability of gold ornaments at home, easy formalities to pledge the asset and get money to meet liquidity mismatch immediately makes loan against gold attractive.

 Hidden Risks: However, there are risks to both sides. 

· The banker has to guard himself against (i) fake ornaments (ii) frauds of gold appraisers/valuers (either singly or in collusion with staff) and (iii) in case of stolen ornaments, the loan will become unsecured (as the pledgee cannot get a better title than that of the transferor) (Importance of proper KYC of the borrower/valuer are 'a given must' to reduce the above risks) 

·   Customer: Gold ornaments available in home carries not only monetary but sentiment values as well. If the loan is not redeemed in time, there are chances that the total outstanding (which includes the principal and periodical interest) might be in excess of the value of gold, forcing the banker to liquidate the loan through auctioning the gold.

Guard against Social Issues: 

As the Pandemic is unrelenting, instances of cut in salaries, job losses, winding up of businesses are on the increase. Auction of gold to realise the money lent might become a new (unhealthy) normal. In fact, I saw one message doing the rounds in several ‘Whatsapp groups’ reading as under:

“Gold Ornament Auction of NPA Customers coming soon”

This was an advertisement displayed in one the largest public sector bank branches. First of all, it is not a fair way of informing the impending auction. Gold is not money alone in Indian context. It is a family asset, given as much importance as land and house owned. As most of the assets are gold ornaments, worn by the individuals, it carries lot of sentimental values as well. Putting out a notice in a flaxi board in the branch will have a negative effect on the reputation of the bank and the branch functioning in that area. The issue might become serious, if it is attempted in a village or town which are located in backward districts. The banker should remember, auction is a part of routine in an NBFC that is doing gold loan business and will not be viewed in that way, when a banker resorts to a large scale auction.

The right way is to first take all steps for recovery like sending notices before and after due date of payment for interest or principal, follow it up with registered notices again as outlined in bank manuals/circular instructions.  After exhausting all steps for recovering the money through individual correspondence, branch should prepare a list of accounts, in which gold ornaments will be auctioned, and publish it in the branch notice board/by way of an advertisement in the newspaper, at least three to four weeks before the proposed auction date. The aim is to realise the money lent and the notice is bound to have the desired result as the borrowers themselves will turn up for clearing the dues/re-pledge the gold after partial payment, etc.

Some Suggestions to avoid large scale auctions:

Commercial Banks are doing a great service by extending loans at affordable rates, when the community is facing financial hardships due to uncertainties to livelihood posed by pandemic related lockdowns, affecting income and production. Overdue personal / other loans, repayment demand of money lenders/ pawn brokers are paid back, using the cheaper gold loans offered by banks. Agriculturists, who have already availed their scale of finance to the maximum, get the loan at the same rate for crop loans, by declaration of land holdings, through pledge of gold loans. So, aggressive sanction of gold loans, during these times, has no doubt created a lot of goodwill about the bank branches in the society. But this goodwill will get wiped out overnight, if the number of auctions for realising dues goes up and attracts public attention. The efficiency in managing gold loan portfolio is determined by the money recivered without resorting to auction for recovery and not by the number of NPAs, as it is fully secured by the most liquid asset. Towards avoidance of auction for recovery, of dues, my suggestions are as under:

1.    Banks may think of introducing a simple cash flow statement for one year to determine the repayment period and affordable EMIs. Even if repayment is stipulated as one year for payment of loan amount plus interest, the customer may be given the option of paying partially before due dates and the EMI chart can be given for his better understanding. 

2.     If inflows are low, overdraft can be sanctioned against gold ornaments with annual interest repayments and renewal subject to compliance of LTV ratio. 

3.     Most of the loans are granted with a stipulation that the money shall be paid as a balloon repayment after one year along with interest. Notices/ messages may be sent after nine and eleven months of sanction of the loan to give the customers adequate time to arrange for repayment/renewal with part payments.

4. A system enabled weekly statement should be made available for perusal and follow up in respect of overdue accounts which have crossed 90% of LTV (value of hold at the time of sanction). 

5. Whenever the price of gold falls below 5% over a 6 month/1 year period, please undertake a review of gold loan portfolio for remedial measures, if any, required.

6. Avoid bulk auctions. Stagger it to avoid adverse publicity, give the loanees face saving retrieval exercise and also to get adequate auctioneers.

V.V. Viswanathan

7^th July 2021