Crisil report: Gold loan lenders are well-protected from price correction risks due to robust risk management, MTM valuation, and auction processes, ensuring asset quality despite higher LTV limits.
The sector’s resilience, riding on robust processes, such as regular mark-to-market (MTM) valuation of gold, adequate LTV buffers and streamlined auction processes, is reflected in negligible credit cost borne by lenders in this segment over the past decade, Crisil said in a report.
Gold prices have risen sharply since fiscal 2024 but remain volatile and susceptible to macroeconomic factors, it said.
As part of a stress test, it said, Crisil Ratings analysed movements in daily spot gold rates over the past 25 years.
A 90-day rolling window has been considered to capture the relevant risk time period, as the process from call notice to auction typically concludes within 45â75 days post maturity.
The sharpest decline noted was 20 per cent, while a price drop of over 10 per cent was observed in only about 2 per cent of instances, it said.
Further, Crisil Ratings also analysed repayment behaviour of borrowers across various disbursement cohorts, recovery patterns in the portfolios of gold loan-focused non-banking financial companies (NBFCs), the track record of risk management frameworks and auction processes, and the collection performance of securitised gold-loan pools.
It shows three key determinants of ultimate credit cost for gold-loan lenders. First, the amounts prepaid before the scheduled maturity of the loans, it said.
“Second, LTV at the time of disbursement and on an MTM basis. Third, effectiveness of the risk management process, including frequent monitoring of MTM LTV, and timely auctions during periods of sustained fall in gold prices,” it said.