GOLD ANALYSIS

India's 3 trillion rupee gold loan market on self-regulation drive

Mushrooming gold loan companies in India have opened up an avenue for households to unlock the value of their gold holdings as prices of the precious metal rise.

Author: Shivom Seth
Posted: Tuesday , 19 Jun 2012

MUMBAI (MINEWEB) - 

Leading gold finance companies in India have decided to form a self-regulatory organisation that will frame a fair business practices code for the industry.

The Indian gold loan market is estimated at over Rs 3 trillion. Organised sector players such as banks and non banking finance companies command just over 25% of the market. According to research firm Crisil, organised sector lending against gold amounts to about $17.32 billion.

The need for self regulation comes in the wake of a decision by the Reserve Bank of India to crack down on the fast growth of the gold loan industry, especially that of the unorganised sector. The clampdown has severely eroded the margins of these companies and has curtailed growth.

Crisil has noted that business growth in gold loans is likely to fall from 80% per annum to 20% to 25% per annum, while return on assets is expected to fall from the current high level of 4.5% to between 2.5% and 3%.

At just 1.2% of the total gold stock in the country at present, most gold loan companies have already seen their volumes slide by over 5% to 15% following the regulator's new norms.

Some 32 million households in India have taken fresh loans against gold in the 12 months to May 2012. Gold loans amounted to $17.32 billion in the same 12-month period. 

Traders estimate this figure could have been much higher if the regulator's norms had not come into play.

For some time now, gold loan companies in India have been under the regulatory scanner for alleged malpractices. In April, the regulator tightened norms on banks' exposure to this industry and also brought down the loan-to-value ratio.

While banks would typically not give more than 75% of the gold value as loan, non bank finance companies' (NBFC) lending could go as high as 95% in case of high purity gold.

Loans against gold ornaments are considered a last resort for many middle class consumers in India. But, exciting features such as easy disbursals, few limits on cash usage and immense flexibility have ensured that gold loans are very popular among people who require cash in a hurry.

The industry has seen a rapid growth, with gold loan focused NBFCs especially witnessing brisk business despite increases in interest rates. The gold loan industry has varied interest rates, depending 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 by the unorganised segment are much higher and can range from 30% to 50%.

Spearheaded by NBFC industry leader Muthoot Finance's managing director George Alexander Muthoot, the self-regulatory body is to include the biggest gold loan NBFCs like Muthoot Finance, Manappuram Finance and Muthoot Fincorp among others. These firms represent about 85% of the gold loans NBFCs in India.

Manappuram Finance, which has seen its loan book grow 200% in the last year, is expecting a slide this year. 

The self-regulatory organisation will ensure that new companies that enter the gold loans business adopt the fair-trade practices set for gold loan companies and deal with norms such as charging annualised rates of interest, release of pledged gold, recovery of interest dues and procedures for auction of pledged gold on non-repayment of dues, among others.

Other NBFCs like Sriram Citi Union and Kosamattam Financiers are also set to join the body. The team has decided to come together and adopt fair-trade practices, and also to represent their case better with the apex bank.

"We feel that the Reserve Bank has not been comfortable with the fast growth of our industry, which led the regulator to tighten norms. By setting up a self-regulatory body, we want to send out a message to the regulator that we are complying with all its regulations,'' said George Muthoot of Muthoot Finance. 

Stating that his company has seen its volumes slide by over 5% following the regulator's norms, Muthoot said this year, he was expecting tempered growth of 10% to 25%, but expects the pace to pick up steam by Q3.

The company has decided to curtail its expansion plans this year and will only add around 300 more branches to its current 3,700 branches across the country. 

For FY 2012, the total volume of gold under Muthoot Finance's custody rose 22% to 137 tonnes from 112 tonnes.

Around 13% of Indian households have taken loans against gold in the last year, with a slightly greater prevalence in rural India. Some 60% of rural households choose the unorganised sector for taking gold loans. These loans are usually taken for funding farming activities in the case of rural households, with an average rate of interest on such loans in the 15% to 20% range. While banks are preferred by urban households, rural households in India resort to the local money lender or NBFC.

With 65% of the gold loan market in rural areas, everyone wants a piece of the action. Firms are developing strategies to target this segment effectively and provide better accessibility to borrowers.

The regulator has directed that gold loan NBFCs with half their assets in gold should have Tier-I capital of 12% by April 2014. Further, these companies cannot lend more than 60% of the value of gold jewellery. The regulator is worried that since these companies lend over 75% of the value of gold, a fall in prices could destabilise the system. 

The central bank has also banned these companies from lending against bullion, primary gold and gold coins, leaving just jewellery.

The gold loan market in India is still under penetrated considering the abundant availability of gold as collateral within Indian private households and the existing size of the gold loan market (approximately 1.2% of the total gold stock). This, traders say, presents significant scope for growth of the gold loan market.