CSB Bank advances contract in Q1 without gold loans

‘Why banks refuse to add gold loan processing fee to interest?’

KOCHI: Imagine CSB Bank’s loan book without gold loans.

(In a different note, financial experts point out that the method of banks charging processihg fee separately on gold loans as misleading. “Both these charges are expressed as a percentage of loan amount, and hence why don’t they combine them to one charge,” they pointed out.)

CSB’s lifeline

Gold loans continue to drive CSB Bank’s lending business and its lending business has become intriguing as the latest data reveals that without the gold loan portfolio, the bank’s advances have actually declined during the first quarter ending June 30, 2024.

The bank has become so dependent on gold loans that as of June end, half of CSB Bank’s advances, or more precisely, 49.75 per cent of the total advances are just gold loans.

This is occurring at a time when even the NBFCs specializing in gold loans are diversifying into other areas of riskier loans.

Only gold loans grew

While gold loans for CSB Bank increased by Rs670 crore, from Rs11,817 crore to Rs12,487 crore during the firsrt quarter ending June 30, the total advances could grow only by Rs527 crore, from Rs24,572 crore to Rs25,099 crore – which undoubtedly brings forth the predominant role of gold loans in the growth of CSB Bank advances.

As of June end, while the total advances stood at Rs25,099 crore, the gold loan portfolio has grown to Rs12,487 crore, accounting for 49.75 per cent of the total loans as of June end.

No capital charge

Gold loans are not only secured and decently remunerative, they carry zero risk as a loan and hence this portfolio doesn’t attract capital charge if the loan-to-value (LTV) ratio is properly managed.

In fact, this has helped CSB Bank maintain one of the highest capital adequacy ratios (CAR) among its peers and maybe, the highest CAR among all Kerala-based banks.

Catch lies in processing fee

It’s true that many banks, including South Indian Bank (SIB), don’t charge a processing fee.

But CSB Bank, along with a few other banks including Federal Bank, charges processing fee, mostly in the range of 0.75 per cent to one per cent for general gold loans.

A processing fee of 0.75 per cent may seem innocuous, but it could amount substantial for small tenures.

For example, 0.75 per cent processing fee is certainly a benign number if the tenure of a loan is one year, and it doesn’t add up much compared with the interest charges.

But the same 0.75 per cent processing fee could work out a three per cent additional fee if the tenure of the loan is three months and more seriously, could go up to 9 per cent if the tenure is as short as one month.

Mind you, the main interest charged on the gold loan by these banks is in the region of only 9 per cent. “Why can’t these banks add this processing fee too into the interest?” CL Joy, a tax expert based in Thrissur, expressed his curiosity while talking to businessbenchmark.news.

He added that doing this could not only enhance transparency, but more importantly, can help the customers save the GST charged on processing fee – as interest doesn’t attract GST, whereas, processing fee does.