Shriram Finance’s September quarter results have caused many to re-evaluate their understanding of loan-to-value valuation and classification of non-performing loans in gold loans, three sources told NDTV Pro. told Fit.
“The moment it (gold loan) violates the 75% LTV norm, we are actually classifying it as an NPA,” managing director YS Chakravarti said in a conference call.
The Reserve Bank of India has mandated lenders to maintain 75% LTV during the term of loans taken against pledges of gold ornaments and jewelery for non-agricultural end use. However, regulators have not required asset classification downgrades in case of LTV violations.
RBI said LTV ratio is calculated on the total account balance including accrued interest and present value of gold jewelery accepted as collateral.
Asutosh K. Mishra, head of institutional equity research at Ashika Stock Broking Limited, said, “Management could have just flagged the account or considered it as an NPA for internal use.” This is called an accounting discretionary provision.”
What is surprising is that the company said it had made NPAs during times when gold prices had increased significantly. This usually results in a better LTV adjustment.
As of September 30, Shriram Finance had a gold book of Rs 6.08 billion, representing 2.5% of its total assets under management of Rs 2.43 billion. The portfolio declined 0.7% from the previous quarter.
Explaining the reason for the sequential decline in Shriram Finance’s gold loan book, Chakravarti said the company had reduced the LTV ratio from 70-73 per cent to 60-65 per cent, which led to a decline in disbursements. Ta.
“Essentially, look at the exit LTV. The standard is 75% of the loan to gold value. This is the stated exit LTV, not the entry. So the cumulative interest and principal is 75% It cannot be surpassed,” he said.
To understand the discrepancy here, it is important to note that NBFCs typically assess the LTV ratio of gold loans at the time of customer onboarding and not at the time of customer exit, the sources said. Ta.
If a violation occurs, the lender can auction the money. However, if someone is repaying the loan regularly, it cannot be classified as an NPA, the official said, adding that this particular phenomenon has not been witnessed in any other company so far. Ta.
According to one of the three people cited above, this appears to be a case of overleveraging, as when the price of gold rises, companies lend more money.
In terms of segment-wise NPA split, Shriram Finance’s total stage 3 assets in its gold loan book stood at 1.95% for the quarter ended September, as against 1.94% a quarter ago and 1.87% a year ago.
Stage 3 net worth was 1.79%, up from 1.80% a quarter ago, and 1.72% year-over-year.
This comes after the RBI in a circular last month advised lenders to review their policies, processes and practices while extending loans against pledges of gold ornaments. The regulator conducted an investigation into how lenders were complying with its standards.
The key deficiencies found by the RBI include deficiencies in the use of third parties for loan sourcing and valuation, inadequate due diligence and lack of end-use monitoring of gold loans, and weaknesses in LTV monitoring.
