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Surveying The Indian Gold Loan Market PDF
Surveying The Indian Gold Loan Market PDF
35,000 600
28% 32,000
41% 500-530
30,000 500
25,000
25,000
46% 400 50% 375
20,000
300
44% 250
15,000 CAGR
13% 11,669
200 CAGR
10,000 37%
6,462 120
100
5,000
25
0 0
FY02 FY07 FY09 FY10 FY02 FY07 FY09 FY10 FY11
Source: Muthoot Finance, August 2011 Source: Muthoot Finance, August 2011
Figure 1 Figure 2
CAGR 73% 74% 64% 32% 46% 13% 58% 19% 52%
80 73
70
60
52
50
40 39
33 33 31
30 26 24
22
20 17 17 19
14 15 16 14
12 12 11 9 11 9
10 5 5 6 6 4
0
Muthoot Manappuram Muthoot Indian Bank Indian Federal South State Bank Andhra
France Fincorp Overseas Bank Indian of Travancore Bank
Bank Bank
FY07 FY09 FY10
Figure 4 depicts the gold loan portfolio size for few limits on cash usage, high LTVs and flexibil-
key organized sector players, again highlighting ity, it is easy to see why gold loans are becoming
the rapidly growing dominance of NBFCs (e.g., more and more popular.
Muthoot Finance, Manappuram and Muthoot
Fincorp). Why NBFCs Are Growing
By virtue of their business model, NBFCs have
Key Features of Gold Loans grown rapidly over the last few years as evidenced
The key features of gold loans in the Indian context by their increase in market share. A comparison
are described in Figure 5. With easy disbursals, of gold loan features across key players is high-
The loan can be used for any purpose, as long as it is not for any illegal activity or spec-
Multi-purpose
ulation in the stock market. NBFCs place even fewer restrictions on the use of loan.
NBFCs and the unorganized sector disburse loans at a much faster pace (as low as
Low disbursal times
three minutes to a few hours) as compared with banks which may take a few days.
High loan-to-value While banks would typically not give more than 75% of the gold value as loan, NBFCs’
(LTV) ratios lending could go as high as 95% in case of high-purity gold.
There is no minimum period for the loan and, if need be, one can return the loan
Shorter loan tenures
amount the very next day. The average tenure of the loan is about 90 to 100 days.
The interest rate depends on the tenure and amount of loan. It varies from 12% to 18%
in the case of banks, while for NBFCs, it could reach 24%. The interest rates charged
Varied interest rates by the unorganized segment are much higher and can range from 30% to 50%.
Reasonable rates of interest are especially applied if the loan to value (LTV) does not
exceed 50-60%.
Repayment can be structured as just interest amount with principal being repaid at the
Multiple repayment
end of the period in one lump sum. Repayment through EMI, covering interest as well
options as principal, can also be an option.
Figure 5
Rate of 12% to 21% 13.45% to 24% 12.25% to 12% to 12.5% 13.5% to 13.75% 15.00%
interest (%) 15.25% 15.75%
Loan-to- Avg of 72%, Up to 85% Up to 90%; 100% Lower of Up to 85% Avg of 73% Based on rate Based on
value ratio high of 85% in some cases 70% or to 76% per gram and rate per
value based purity gram and
(%) on rate per purity
gram and
net weight
Processing 0 0 Rs. 5 to Rs. 75, 0.5% Rs. 202 per 0 0.25% Nominal
fee based on loan for loans lakh; Rs. 300 appraiser
amount greater than appraiser charges
Rs. 25,000 commission
Pre- 0 0 0
payment
penalty
(Rs.)
Documenta- Only ID at Only ID at Only ID at ID proof Proof of Asset ID proof ID proof ID and
tion disbursal disbursal disbursal and asset commercial ownership and asset and asset residence
ownership activity; proof ownership ownership proof
documents unaudited and bank documents documents
balance account
sheet for > 3
lakhs; jewel
appraisal
certificate
Figure 6
Lender Banks/NBFCs
Loan
Category Indian State
Muthoot Muthoot Federal South Indian
Manappuram Indian Bank Overseas Bank of
Finance Fincorp Bank Bank
Bank Travancore
NA NA NA 11% to 11% to 11.03% to 13.65% to 11.5% to
Home Loan
11.75% 11.75% 11.53% 14.90% 12.25%
Figure 7
A comparison of interest rates charged by lenders The increase in gold prices over the last few
across loan categories is shown in Figure 7. The years, coupled with the surge in gold loan
comparison of interest rates shows that gold borrowings during this period, could create a
loans fetch banks higher rates as compared to gold bubble which could burst in the event of a
home loans and car loans. Hence, this category significant correction in gold prices. Banks/NBFCs
is being targeted aggressively by banks. However, with significant exposure to gold loans could
NBFCs have a much greater focus on gold loans face widespread defaults, which could adversely
and continue to provide attractive loan features impact the economy.
which enable them to charge higher rates,
generate higher profits and grow rapidly in a The organized sector today manages these risks
singular direction. through various methods such as enhanced
security, insurance cover, buying gold futures, etc.
Risks to Borrowers and Lenders
Regulatory Environment
Since lenders take possession of the gold assets
in a loan transaction, in case of a theft they may While there are no means of controlling the unor-
not have sufficient funds to compensate all the ganized sector, the organized sector of banks and
borrowers for their loss in its entirety. This is more NBFCs come under the purview of the Reserve
important for loans placed in the unorganized Bank of India (RBI) which has norms to regulate
sector; banks/NBFCs usually have better security the gold loan market.
and insurance coverage. Furthermore, financial
NBFCs had been traditionally disbursing gold
packages cannot compensate for the personal
loans through funds received from banks under
attachment a borrower has with the gold assets.
priority lending for the agricultural sector. The
Moreover, a sharp decline in gold prices increases loans under this category enjoy an interest
the original LTV. A lender may require an rate discount of approximately 200 bps over
immediate recovery of any amount that exceeds the normal interest rates charged by banks. But
the original LTV ratio, but the borrower may be to reduce the risk in the system, the RBI ruled
unable to pay this amount. Restructuring of the in February 2011 that bank credit to NBFCs for
loan may be required in these cases. Addition- lending against gold jewelry will not be treated as
ally, if the value of the pledged asset declines, a exposure to the agricultural sector. The resulting
borrower may be more willing to default on the higher interest rate for funds is expected to
loan. This poses a serious concentration risk to promote better lending practices by NBFCs to
the lender, especially to the NBFCs that have a creditworthy borrowers.
high exposure to gold loans and lend at high LTV
With the continued rapid growth of the gold
ratios.
loan market in India, RBI has started examining
References
Muthoot Finance, NCD Prospectus, Aug 2011
India Securitization Summit 2009, White Paper
RBI, Draft Revisions to the Guidelines on Securitization Transactions, Sept. 2011
http://articles.economictimes.indiatimes.com/2011-06-03/personal-finance/29617389_1_gold-loan-gold-
prices-loan-size
http://www.neytri.com/gold-loans-what-you-must-know/
http://thegoldwatcher.blogspot.com/2011/05/indian-gold-loan-market-expanding.html
http://articles.economictimes.indiatimes.com/2011-09-06/personal-finance/30119263_1_gold-loans-nb-
fcs-personal-loan
http://www.apnapaisa.com/loan/gold-loan-india/rates.html
http://online.wsj.com/article/SB10001424053111904265504576567780324461332.html
http://www.thehindu.com/business/Economy/article2376650.ece
Ashish Shreni is the Consumer Lending Practice Head with Cognizant Business Consulting and has worked
for over 12 years in the BFSI space on projects spanning business and IT strategy, business process
optimization and complex project execution. He can be reached at Ashish.Shreni@cognizant.com.
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