Rising financial distress and the inability to meet banks’ collateral demands are forcing Indian households to give up pledged gold jewellery despite its sentimental value. Many lenders are now planning to auction jewellery pledged with them, as the second wave of the coronavirus pandemic hits customers who are typical gold loan borrowers.

As the pandemic hit last year, the central bank allowed banks to lend up to 90% of the value of the pledged gold till 31 March 2021, up from 75% earlier. Banks must maintain this loan-to-value, or LTV, at all times. After gold prices started falling this year, and the LTV reverted to 75%, lenders began pressing borrowers to bring more gold or repay some of the loan immediately. However, with incomes lost and medical expenses rising, many have had to let go of the gold, triggering the auctions.

Industry watchers say gold loan customers typically come from the lower end of the middle class, many of whom are daily wage earners whose incomes have been hit. “The pandemic has made it difficult for some of these customers to repay,” said C.V.R. Rajendran, chief executive of Kerala-based CSB Bank. As of 31 March, 39.8% of CSB Bank’s advances were through gold loans, at 6,131 crore, up 61% from last year.

According to Rajendran, as gold prices dropped from last year’s highs, borrowers were asked to increase collateral or repay some portion of the loan. Failure to do so has led to lenders putting up auction notices, which Rajendran said, is also used to persuade borrowers to repay. “Once auction notices are put up, we have seen that a significant percentage of borrowers repay as gold has a sentimental value,” he said.

Bloomberg Quint reported on 5 May that newspaper advertisements on gold loan auctions have become frequent in the past few weeks. Gold prices have fallen 15% from the highs of August last year, with 10g of gold now costing 47,569, as per MCX Gold Spot data sourced from Bloomberg.

India is in the middle of a medical emergency, with more than 3.6 million active covid infections, and 270,284 people have already succumbed to the virus, official data showed.

Last year, many banks entered the race for gold loans, traditionally the bastion of non-bank financiers, encouraged by the increase in LTV aimed to mitigate the impact of the pandemic on households, entrepreneurs and small businesses. Since June 2020, loans against gold surged even as lending to other segments were affected by asset quality concerns, rating agency Crisil pointed out on 12 April. In the 11 months through February 2021, loans against gold grew about 70% for banks to cross 56,000 crore, it said.

“The average loan-to-value of the gold-loan books of banks is estimated at 75-80% currently versus 70% before the RBI relaxation. Given that gold prices have dropped 18-20% from their August peaks on an absolute basis, without periodic interest collections, the books of banks may be susceptible to asset-quality issues to some extent,” said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.

Although banks have been pivoting to secured assets, fluctuations in gold prices and the second wave do not bode well for asset quality. Bankers believe that since the current set of restrictions are still not as strict as last year’s national lockdown, the impact on people’s incomes will be limited. That said, retail distress has started surfacing in the form of auto-debit repayment failures, which started rising in April.

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