Gold loans popularity

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Hyderabad: With her sisters

wedding just two weeks away in
May, Jomol Mathew needed to raise
Rs1 lakh in a hurry to pay for the
wedding expenses

A middle-class homemaker from

Perumbavoor, in Ernakulam district
of Kerala, she approached a local
branch of Manappuram Finance Ltd
on the advice of a friend and,
overcoming initial qualms, pledged
80g of gold in return for the money
she needed.

I did not have to go through the

kind of lengthy and tedious
formalities the regular banks
mandate for taking a loan, Mathew,
who is in her late 20s, said in a
telephone interview from
Perumbavoor. Another big
advantage is the time taken for the
loan process. Within minutes, I got
the cash.

From Perumbavoor to Patna,

borrowers such as Mathew in need
of emergency funds have in recent
years been increasingly turning to
gold loans, attracted by the liquidity
and convenience they offer
minimal paperwork and almost
instantaneous access to cash after
the metal passes purity tests.

According to a report by Icra

Management Consulting Services
Ltd, the organized gold loan market
in Indiathe worlds biggest
consumer of the metalgrew at a
compounded annual growth rate
(CAGR) of 40% between 2002 and
2010, and is poised to expand 3341% in 2011.

The value of gold stock in India has

grown at 22% CAGR in 2002-2010,
according to Icra Management
Consulting Services.

It is a tool of financial inclusion

and is very important to a country
like India where most of the
families hold gold in some quantity
at least, said V.P.

Together, Manappuram and

Ernakulam-based Muthoot held a
combined 165 tonnes of gold stock
as of the end of Marcharound
one-quarter of the 615 tonnes
parked in the vaults of the Reserve
Bank of India.

There is still vast room for growth

in gold loan assets in a country
where privately held stocks are
estimated by the World Gold
Council at between 15,000 tonnes
and 20,000 tonnesthe value
translating to the equivalent of
nearly 60% of Indias gross
domestic product (GDP).

The price of physical gold, which

has been scaling records
internationally, gained 16.15% to
Rs2,135 per gram at the end of
June from Rs1,838 per gram a year
earlier, according to
Goldpriceindia.net, which tracks
gold market trends.

To be sure, the concept of gold

loans is not new. State-owned
banks have had the product in their
loan portfolio although it hasnt
been a priority.

The unorganized sector pawn

brokers in the cities and towns and
money lenders in the villages
have dominated gold lending, often
charging usurious rates.

Only 10% of privately held gold in

the country is in the loan market. Of
the 10%, only around 25% is in the
organized market with the rest
being in the hands of pawn shops
and money lenders, according to
Icra Management Consultings
Gold Market report 2010.

But the success of Manappuram

and Muthoot in recent years is
attracting other finance companies
to the business. Cholamandalam
Investment and Finance Co.
Ltd (CIFCL) is set to enter the gold
loan business, the Business
Standard had reported on 6 May.

The financial services arm of the

Mahindra Group last year started
offering loans against gold
ornaments.

 Reliance Commercial Finance Pvt.

Ltd, a part of Anil Ambani-owned
Reliance Group, has launched a
variantgiving loans against units
held by investors in the gold fund
of Reliance Mutual Fund.

Besides households, gold lenders

are trying to tap a new market in a
country where gold jewellery has
traditionally been salted away in
family vaults to be passed on from
generation to generation as
heirlooms rather than a funding
source, according to some
analysts.

Gold, in spite of its high

commodity value, was always an
unproductive asset kept at home,
said Harsh Vardhan Roongta, chief
executive officer ofApna Paisa Pvt.
Ltd, an online provider of
information on loans.

Gold financing NBFCs (nonbanking financial companies) are

targeting a new segment of
customers who otherwise would
not have taken a gold loan, he
said. For instance, businessmen
who want to start a new business
venture now approach gold
financing companies.

The leaders in gold loans are

stepping up their own expansion
plans.

More than 60% of our branches

are in rural and semi-urban areas,
where local money lenders and
gold pawn brokers dominate the
market.

We are still expanding our

business there, said George
Alexander Muthoot, managing
director of the Muthoot Group of
companies, in a telephone
interview.

Muthoot Finance posted a net

profit of Rs493 crore last year, up
117% from the previous year.
According to its website, the
company had loans outstanding of
Rs15,728 crore at the end of the
last fiscal, notching up 114% annual
growth. It has around 3,000
branches across the country.

We are trying to make the business

more transparent and convenient, in
a way that it caters to the needs of
even the upper middle class in the
country, said George Muthoot, who
at the time of the companys listing
in May predicted that the rising price
of gold would boost the borrowing
power of gold owners and benefit
his company.

Manappuram Finance, which has

2,565 branches across India,
posted a net profit of Rs283 crore
in the last fiscal, up 135% from the
year before, and had loans
outstanding of Rs7,500 crore.

The company, which tripled its loan

assets in the last fiscal, plans to
expand its presence in rural and
semi-urban areas, said
Nandakumar. According to World
Gold Council reports, two-thirds of
the gold demand in India comes
from the rural agricultural sector.

In spite of the tight liquidity

problems in the market and the
overall economy slowdown, we
expect to register a 60% growth in
revenues this year, Nandakumar
said.

The rising demand for gold loans is

partly driven by the convenience
factor. The companies say
processing time is five minutes.
The loan is sanctioned and
disbursed once staff check the
weight and assess the value of the
gold after gauging purity..

At the time of taking a loan,

customers need to submit identity
proof, which is mandatory under
the know-your-customer rules.
There is no other formality to be
met

The ease of transaction partly

offsets the interest that gold
lenders charge, which is higher
than that levied by commercial
banks. State Bank of India, the
nations largest lender, charges
13.5% per annum on gold loans.

At Manappuram and Muthoot,

depending upon the loan to value
of the gold, the rates vary between
12% and 24%. Local money lenders
charge 36% on average for gold
loans

According to the finance

companies, gold loans are the
safest mode of lending. More than
the commodity value, the emotional
attachment the borrower has with
the metal makes gold the safest
collateral.

Manappurams defaulted loans

(non-performing assets) have never
gone beyond 0.25% of the total
loan. Last year it was just 0.18%,
said Nandakumar.

According to V.A. Joseph,

managing director and chief
executive officer of South Indian
Bank, gold loans are not prone to
risks caused by fluctuations in the
value of the metal.

Lenders typically advance 70% of

the value of the collateral, leaving
themselves a margin of safety. The
short-term nature of gold loans
which could have a tenure as brief
as a weekalso offers lenders
protection against price volatility.

Gold financing growth has been

promoted by heavy advertising.
Manappuram, for instance, counts
among its celebrity brand
ambassadors, Bollywood
actor Akshay Kumar and South
Indian actors Mohanlal, Venkatesh
and Vikram.

The rapid advertising has helped

the company to grow a lot,
Nandakumar acknowledged.

Gold lenders may need to invest

more to expand more rapidly in
markets where they still have a
limited presence; they still do a
lions share of their business in the
south.

The existing markets for NBFCs

are getting saturated. To grow
further, they should break into new
markets in the west and the north
of the country, said V. Sriram, chief
general manager, Icra Management
Consulting Services.

This will require a lot of market

development activities as the
concept needs to be sold in these
market. They have already started
this.

According to Sriram, the growth

will have to come from taking
market share from unorganized
money lenders, which calls for
more intensive marketing in interior
and rural locations.

This will increase their cost of

operations, but can be a good
growth opportunity, he said.

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