Can gold loan firms return to heyday despite new RBI directive?

The March 21 direction by the Reserve Bank of India asking gold loan companies not to give loans in excess of 60 per cent of the value of the collateral has hit the non-banking finance companies where it hurts the most. The gold loan firms make robust profits only when their loan-to-value (LTV) goes closer to the value of the jewellery. In the case of Manappuram Finance - the second largest gold loan company - the average loan-to-value ratio is 66 per cent, 6 percentage points above the RBI's latest prudential norm.    

The largest gold loan firm, Muthoot Finance, charges an interest rate of between 12 and 24 per cent, and its average loan ticket size at the end of December quarter was Rs 40,000 - a 25 per cent year-on-year increase. The rate of interest tends to be on the lower side if the loan amount sought is at the lower side of the value of the jewellery and for a short period. But few borrowers would want to pledge too many pieces of jewellery to get the best rate. They would not mind paying a slightly higher rate if fewer ornaments would do for the pledge. 



As the gold loan companies, all based in Kerala, showed feverish growth in business in recent quarters, the keen watchers of the sector saw the trouble coming. They knew RBI, as the watchdog, would not sit tight and do nothing as one sector overheated (the RBI calls this concentration risk).  For example, Muthoot Finance's total income grew 91 per cent year-on-year at the end of the December quarter.  All the leading players have been aggressively opening new branches to tap the latent demand and grow their business. Their USP lies in the ease with which they dispense loans in about 10 minutes after submitting the jewellery.

Gold loan firms have been growing steadily because they are known to lend against jewellery and not primary gold.  Indian families, especially in the South where these firms get bulk of their business, have a certain sentiment attached to each piece of the family jewellery. They would have bought them on different occasions - such as marriage, birthday, and anniversaries - and hence, would not want to lose them at any cost. This explains why the non-performing assets (NPA) at these companies are very small.

With the loan-to-value dropping, the established players are bound to face competition from unorganised lenders. To save and grow their turf, the gold loan non-banking finance companies may have to cut their peak rates of interest and keep their loan products attractive. Even then, it is doubtful if they can ever return to their heydays of the gold loan hungama.