Prolonged monetary tightening and banks? reluctance to provide easy loans have lured millions of people to non-banking finance companies (NBFCs) for ?hassle-free? advances against gold, boosting their businesses like never before.
Profits of NBFCs focussing on gold loan business have nearly doubled in the first three quarters of the fiscal, at a time when tight liquidity slowed growth in banks’ retail advances.
Kerala-based Muthoot Finance, the country?s largest gold loan company, is expecting profitability to soar at least 74% in the fiscal year through March to around R860 crore. Its profit rose 85% in the first nine months of 2011-12 to R657 crore. Similarly, the second-largest gold loan provider Manappuram Finance more than doubled profit to R404 crore in the first three quarters, compared with R181 crore the year before.
?Less paperwork, easy availability of loans, trust in the organised sector and much lower interest rates compared with small-time money lenders are driving NBFCs? gold loan business,? Muthoot Finance managing director George Alexander Muthoot told FE.
Gold has traditionally been seen as the poor man?s hedge against adversity. However, analysts say this perception is changing as people from all walks of life seek loans against the precious metal. Indian households have 18,000 tonnes of gold worth around $1 trillion in reserves.
Although key public sector banks? retail advances rose in 2011, the pace of growth suffered due to the central bank?s monetary policy which has been steadily tightened since March 2010. Lenders have remained worried about a jump in bad loans, an executive with a Mumbai-based asset management company said.
Retail advances of the country?s largest lender State Bank Of India rose 11.89% to R175,000 crore through December 2011 from a year before, lower than its 12.64% rise in overall advances.
The retail book of ICICI Bank ? the country’s largest private lender ? once made up for more than a half of its loans, but it dropped to 33.5% as of December 31 from 38% the previous year.
While Muthoot held around 130 tonnes of gold pledged by borrowers on December 31 compared with 102 tonnes the year before, Manappuram’s reserves soared to 69.54 tonnes from 46.57 tonnes during the period. Muthoot’s gold loan portfolio has swelled 66% to Rs 22,695 crore as of end-December from a year before, while Manappuram’s advances jumped 90% to Rs 12,358 crore during the period.
Muthoot has recently proposed to raise Rs 250 crore through a public issue of secured, redeemable, non-convertible debentures, with an option to retain oversubscription up to Rs 250 crore. The issue, which runs from March 2 to 17 offers yield of up to 13.43% depending on the date of maturity. The company had raised Rs 693 crore and Rs 459 crore through a public issue of NCDs in August 2011 and December 2011 to fund expansion.
India’s gold imports, a key indicator of domestic demand, will likely remain good this year, said Ajay Mitra, managing director for India and the Middle East at the World Gold Council. Factors including rupee fluctuation, gold price and government policy will influence India’s demand in 2012, he added. Robust gold demand may mean another good year of business for such NBFCs.
?Initial feedback from retailers suggests the first quarter of 2012 will be better than the last quarter of 2011. The rupee has strengthened and volatility is less,? said Mitra.
?We need funds to grow as the potential of growth in such businesses remains huge but remains mostly untapped,? Muthoot’s Alexander said. His company charges an average interest rate of 22% on loan against gold, much lower than 35-40% asked by money lenders in rural areas. It offers advances against 67% of the value of gold pledged by the borrower to ward off any fall in the precious metal’s prices in future.
The Reserve Bank of India has raised key policy rates 13 times since March 2010 to squeeze liquidity and check inflation.
Banks such as SBI and HDFC Bank have been providing loans against gold, albeit on a minor scale. HDFC Bank, the second-largest private sector lender, has doubled its gold loan portfolio in the past one year, while Axis Bank, which recently forayed into this business, plans to boost the business as well. Lured by the success story, NBFCs like Magma Fincorp are reportedly planning to entering the business.
