Demand for gold loans set to revive

After a significant decline in business in the quarter ended June, leading gold loan companies are set to see a reversal of fortunes. In fact, the recovery already started in August, with a revival in the southwest monsoon.

Leading gold loan company Muthoot Finance reported a five per cent decline in assets under management (AUMs) in the jewellery loan category at Rs 23,082.1 crore (Rs 230.82 billion) in quarter ended June, compared with Rs 24,417.3 crore (Rs 244.17 billion) in the previous quarter.

However, overall AUMs posted an increase of about 30 per cent, compared with Rs 17,803.5 crore (Rs 178.03 billion) in the corresponding quarter last year.

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Attributing the decline in business in the first quarter to restrictions imposed by the Reserve Bank of India (RBI), Oommen K Mammen, chief financial officer, Muthoot Finance, said, "In the July-August period, gold loan demand revived significantly. From a five per cent decline in the first quarter, for both AUM and gold holding, the decline has been much lower in these two months. Hence, we may recover the loss in the second quarter."

"The banking sector regulator has disallowed lending more than 60 per cent of loan to value (LTV). Though we have been maintaining this LTV figure for several years, the RBI guidelines have tilted the business towards local moneylenders and banks. Nevertheless, our business would be growing 15-20 per cent this financial year, against a staggering 55 per cent last year," he added.

LTV ratio is the number of loans a lender can offer, based on the value of the gold being deposited as collateral.

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New RBI regulations have stipulated restricting LTV to 60 per cent, maintaining minimum Tier-I capital of 12 per cent by April 1, 2014, and not lending against bullion or primary gold and coins.

Many say the new LTV norm is discriminatory and does not provide a level playing field in the gold loan industry. As the norm is not applicable to banks (which have a sizable share in this business) and the unorganised sector (whose portfolio could be many times the organised sector's), this has resulted in a shift of business---from organised non-banking financial companies (NBFCs) to unorganised entities.

Since the unorganised segment doesn't have standard practices and charges very high interest, the result is years of hard work by organised NBFCs in inducing a shift in business to the organised sector is coming to naught.

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Muthoot Finance Managing Director George Alexander Muthoot said, "These regulations have definitely slowed the growth of the industry at large, and also of our company. However, we are going slow on aggression and concentrating on expanding business from the existing branches, instead of opening new ones.

We plan to open only 250 branches this year. This being a year of consolidation for us, our growth is expected to be moderate at 10 per cent, in terms of AUMs. We hope to maintain profitability."

Usually, during the kharif monsoon season, farmers mortgage gold jewellery to buy high-quality seeds and fertilisers, repaying the loans after the harvest. This season, however, the number of farmers pledging gold jewellery has declined 10-15 per cent.

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Mammen said, "The majority of customers come from non-farm categories, and they avail of funds by mortgaging gold for short-term working capital needs. That business continues to prosper, and its future looks good. So far in the second quarter, the demand for loans has revived."

Another gold loan company, Manappuram Finance, saw a decline of about seven per cent in the quarter ended June at Rs 10,851.5 crore (Rs 108.51 billion), against Rs 11,630.8 crore (Rs 116.3 billion) in the previous quarter. I Unnikrishnan, managing director of the company, said, "We are not growing at all this year."

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Manappuram's AUMs rose 54 per cent to Rs 11,630.8 crore over the year-ago period's level of Rs 7,549.1 crore (Rs 75.49 billion). The company's overall gold holding declined 7.59 per cent in the quarter at 60.59 tonnes, compared with 65.57 tonnes in the previous quarter.

After RBI's guideline on LTV, NBFCs that were lending more than 60 per cent LTV, including Manappuram, immediately ensured they lowered the LTV on fresh loans.

Pradeep Agarwal, analyst with Emkay Global Financial Services, says NBFCs were hit in the first quarter. Though growth in business would nullify the losses, growth would remain low the entire year, he added.