Concerns Raised by Finance Ministry

This comes on the heels of the finance ministry last month asking all banks to review their gold loan portfolios, according to news agency PTI. The ministry flagged issues strikingly similar to the IIFL case, including inadequate collateral, repayments in cash, and problems around collection of fees.

Issues Found in IIFL Case

In the IIFL case, the central bank found “serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc.”

Rise of Gold Loans During Covid

Gold loans, once a mainstay of mainly NBFCs, soared during covid, which affected life in India from March 2020 onwards, and its aftermath. Families, without access to credit otherwise, put up gold ornaments and possessions as collateral for loans at a time when other sources of income dried up.

Factors Driving Gold Loan Uptake

The incentive to take gold loans was driven by two factors. One, a move by the RBI to increase the loan-to-value ratio of non-agricultural gold loans from 75% to 90%. Two, a sharp jump in the price of gold itself.

Banks vs NBFCs

Although banks steadily expanded their gold loan portfolios, NBFCs still account for around 60% of gold loans. According to rating agency Crisil, “While NBFCs are known for their servicing agility, banks have focused on borrowers seeking bigger loans and competitive interest rates…banks have sharpened focus on non-agricultural gold loans for personal use, particularly in the ₹3 lakh and above ticket sizes, over the past 3 years.”

Regulatory Scrutiny on Gold Loans

The fast pace of gold lending, and the backdrop of distress in which it happened, meant an increase in bad loans was likely. Gross non-performing assets (NPAs) of gold loan NBFCs increased from 0.5% in 2021-22 to 2.3% in 2022-23. Yet, NPAs on gold loans are below that of other types of loans.

Top Players in Gold Loan Market

Between them, the top three gold loan companies—**Muthoot**, **IIFL** and **Manappuram**—account for close to three-quarters of the gold loans given by NBFCs that were outstanding as of March 2023. Muthoot is a clear leader, at 43% market share.

Before the pandemic, Manappuram was well ahead of IIFL, with almost double the market share (15% vs 8%). But IIFL’s aggressive push during the pandemic and post-pandemic years, meant that it leapfrogged Manappuram in March 2023.

Impact on Gold Auctions

A rise in default rates is a sign of distress among borrowers. The surge in distress gold loan borrowing during the pandemic was followed by defaults, causing lenders to auction gold collateral to recover loans. Gold auctions soared as a result.

The first nine months of 2023-24 have been the quietest yet in terms of gold auctions, but ominously, the December quarter saw a sharp jump in auctions by both Muthoot and Manappuram.

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