Copyright infringement not intended

Picture Courtesy: Indian Express

Context:

The economic slowdown has resulted in a 30% increase in gold loan NPAs between April and June, making it difficult for borrowers to repay loans to banks and non-bank financial institutions.

About Non-Performing Assets (NPAs)

These are loans or advances where the principal or interest payment is overdue for more than 90 days. Banks treat loans as assets because the interest paid on them is a significant source of income. When customers can’t make the payments, the loan stops earning for the bank and is classified as a non-performing asset.

The Reserve Bank of India (RBI) defines NPAs as assets that no longer generate income for the bank, meaning the loan is not being paid back, and no interest is being earned on it.

Banks classify NPAs into three categories:

1. Substandard Assets are NPAs that have been overdue for less than or equal to 12 months.
2. Doubtful Assets are substandard assets that have remained in that category for more than 12 months.
3. Loss Assets are considered uncollectible. Their value is so low that they are not worth continuing as a bankable asset, though some recovery might still be possible.

Why have gold loan NPAs increased in recent months?

The non-performing assets for gold loans increased by 30% in the first quarter of 2024, mostly due to a slowing economy. This increase is directly proportional to borrowers' increased debt levels. Individuals have found it more difficult to repay their loans as their income levels declined due to the economic slowdown.

Commercial banks' NPAs increased by 62%, to Rs 2,445 crore by June 2024, up from Rs 1,513 crore in March 2024. Non-banking financial companies (NBFCs) experienced a 24% increase, raising their NPAs to Rs 4,251 crore from Rs 3,636 crore during the same period.

What role did rising gold prices play in this situation?

As gold prices increased, more people rushed to pledge their gold to meet household expenses, education fees, and medical bills.

However, many borrowers didn’t expect that the loan amount would surpass the value of the gold pledged. This, connected with an inability to repay, led to defaults.

These defaults negatively impacted their credit scores, making it even harder to secure loans in the future.

How have gold loans performed in terms of growth?

Gold loans have increased in recent months, due to the rise in gold prices. For example, banks' outstanding gold loans rose to Rs 1,54,282 crore by October 2024, up from Rs 1,02,562 crore in March 2024.

Across banks and NBFCs, the gold loan book together has crossed the Rs 3 lakh crore mark. Despite this growth, a growing share of these loans is now turning into NPAs, especially in the wake of the economic slowdown.

What actions are being taken by the RBI to address the issue?

The Reserve Bank of India (RBI) has detected irregularities in the gold loan sector, like weaknesses in monitoring loan-to-value ratios and the lack of transparency during gold auctions.

The RBI has urged lenders to review their policies and improve credit assessment practices.

It recommended improving financial literacy for borrowers and presenting more flexible repayment options to prevent defaults.

Must Read Articles: 

INDIA’S NON-PERFORMING ASSETS (NPA) CRISIS

RBI’S GOLD LOAN NORMS

Source: 

Indian Express