30% Jump in Gold Loan NPA’s, Key Statistics and Reasons

Explore the issue of Gold Loan NPAs, examining causes, impact on financial institutions, and strategies to manage and reduce non-performing assets in the gold loan sector.

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Context: According to data provided by RBI Non-Performing Assets in gold loans have increased significantly among banks and non-banking finance companies (NBFCs).

Key Statistics on Gold Loan NPAs

Total NPAs: Rose 30% to ₹6,696 crore by June 2024, up from ₹5,149 crore in March 2024.
Commercial Banks: NPAs increased 62% to ₹2,445 crore by June 2024 from ₹1,513 crore in March 2024.
NBFCs: NPAs increased 24% to ₹4,251 crore by June 2024 from ₹3,636 crore in March 2024.
Gold Loan Growth: Gold loan growth for FY 2022-23 stood at 6%, reflecting slower growth compared to previous years.

Reasons behind Gold Loan Defaults

Rising Indebtedness: A slowing economy has impacted income levels, reducing borrowers’ repayment capacity.
High Gold Prices:
- Increased gold prices encouraged people to pledge gold to meet expenses like household needs, education fees and medical bills.
- Borrowers often defaulted due to the loan amount exceeding the gold’s purchase price, impacting their credit scores.
Deficiencies in Loan Segment flagged by RBI:
- Weak monitoring of loan-to-value (LTV) ratios.
- Incorrect application of risk weights.
- Lack of transparency in gold auctions.

Non-Performing Assets (NPA)

It is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days.
Classification (as per the RBI guidelines):
- Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset that has remained in the substandard category for a period of 12 months.
- Loss assets: It is considered “uncollectible” or of such little value that its continuance as a bankable asset is not warranted, although there may be some recovery value.
Metrics that help us to understand the NPA situation of any bank:
- Gross NPA: It refers to the total NPAs of the banks.
- Net NPA: Net NPA is calculated as Gross NPA -Provisioning Amount.
  - i.e. Net NPA gives the exact value of NPAs after the bank has made specific provisions for it.