Hyderabad: With her sister’s 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 India—the world’s biggest consumer of the metal—grew at a compounded annual growth rate (CAGR) of 40% between 2002 and 2010, and is poised to expand 33-41% 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. Nandakumar, chairman of Thrissur-based Manappuram Finance, which went public in 1995 to become India’s first listed provider of gold loans and was joined on the stock exchange in May this year by its bigger competitor Muthoot Finance Ltd, which also has its roots in Kerala, after a Rs900 crore initial public offering.
Quick cash: An employee of Manappuram Finance evaluates the jewellery for loan against gold at the bank’s Paharganj office in New Delhi. Ramesh Pathania/Mint
Together, Manappuram and Ernakulam-based Muthoot held a combined 165 tonnes of gold stock as of the end of March—around 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 tonnes—the value translating to the equivalent of nearly 60% of India’s 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 hasn’t 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 Consulting’s “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 variant—giving 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.
Creating new customers
“Gold, in spite of its high commodity value, was always an unproductive asset kept at home,” said Harsh Vardhan Roongta, chief executive officer of Apna Paisa Pvt. Ltd, an online provider of information on loans.
“Gold financing NBFCs (non-banking 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 company’s 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 nation’s 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.
“Manappuram’s 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 week—also 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 lion’s 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.