CSB Bank sees rise in gold loan NPAs in Q1FY22 as second COVID wave hits recoveries

CSB Bank said it had suspended recovery efforts during the quarter, keeping the interests of customers in mind.

Thrissur-based CSB Bank saw a rise in bad loans in the gold loan segment in the April-June quarter of FY22 as the second wave of COVID-19 hit repayments. Gold loans are typically considered among the safest loan products and show low levels of delinquency.

CSB Bank reported slippages worth Rs 435 crore during the quarter, of which Rs 337 crore came from gold loan accounts. “Covid second wave, coupled with the LTV (loan-to-value) management of gold loans, did pose some challenges in the first quarter of FY22. Lockdowns, alternate holidays, slowing down of the economic activity, controlled movements due to strict
social distancing norms, lack of transport etc restricted the customer access to branches which in turn impacted both the fresh pledges and releases,” said CVR Rajendran, Managing Director & CEO, CSB Bank.

LTV ratio refers to the value of a loan given as a ratio of the value of the gold which the loan is backed by. When gold prices fall, lenders must seek more gold from the borrower in order to account for the change.

Since the beginning of 2021, many lenders have been issuing auction notices for gold, suggesting that stress in the segment has risen. In May, Manappuram Finance said it had auctioned gold worth Rs 404 crore during the quarter ended March 2021, as against just Rs eight crore worth of gold auctions held during the first three quarters of financial year 2021.

Gold loans accounted for 38 percent -- Rs 5,627 crore -- of CSB Bank’s loan book as on 30 June, 2021. CSB Bank said it has been seeing an improvement in the recoveries of gold loans after the lifting of lockdowns. The slippage ratio in the bank’s gold loan portfolio stood at three percent in June, down from five percent in May and four percent in April. The rate of recovery improved to 62 percent in June from 46 percent in May and 20 percent in April.

CSB Bank said it had suspended recovery efforts during the quarter, keeping the interests of customers in mind. The lender had raised its LTV last year to 90 percent in order to cater to the financial needs of people, but it later reduced the ratio to 75 percent. Lending is now being done only to the extent of 63-68 percent of the gold value. A fall in the prices of gold led to margin calls and additional money from the borrower and that was partly responsible for the rise in bad loans, Rajendran said.

Rajendran explained that people typically redeem their gold jewellery for a social or religious occasion and repay their loans. As a result, the life cycle of a gold loan is only four to five months. “Now there are no social occasions happening and there is no compulsion for people to redeem the gold. That was another reason why gold loans were not being redeemed during this period. But our mark-to-market loss has come to almost nil now,” Rajendran said.

Even though auction notices are being issued, very little gold has actually been auctioned by CSB Bank. “We decided that we will not go for auctions in a big way. For another two quarters, we should see NPAs, but it should be below what we now have. By the fourth quarter, we will be completely out of this problem,” Rajendran said.