Gold loans normally have a tenure of one year and used to be repaid in one bullet repayment along with interest. However, in the past couple of years, forced by a decline in gold prices, these companies have started collecting interest from borrowers at periodic intervals without waiting for loan maturity.
Gold loan NBFCs are reporting lower delinquency leading to lesser auctions by switching over to periodic collection of interest and shorter product tenures. Profitability of the gold loan lenders have surged back to the levels seen in 2012 with rating agency Crisil reporting that fiscal 2017 saw return on assets rise to over 4% from around 2.5% for fiscal 2014, with the players making two major changes to their business model. It is estimated that less than 2% of the total gold stock in India is used for pledging gold loans. Gold loans normally have a tenure of one year and used to be repaid in one bullet repayment along with interest. However, in the past couple of years, forced by a decline in gold prices, these companies have started collecting interest from borrowers at periodic intervals without waiting for loan maturity. VP Nandakumar, managing director and CEO of Manappuram Finance said that regular interest collection like the EMI model has helped in lowering delinquency leading to lesser auctions. “Earlier the payment of principal and interest was clubbed together at the end of the tenure and some found it difficult to muster the amount needed. Monthly or quarterly payments have helped in lowering the payment at the end of the tenure leading to lower defaults,” he said.
“Periodic interest collection has ensured the loan-to value ratio remains intact and gold price declines do not result in interest loss, which was a key reason for reduced profitability in the preceding few years. It also reduces the chances of delinquency as the borrower’s equity in the pledged gold does not reduce,” said Krishnan Sitaraman, senior director, Crisil Ratings, in the report.
Ashika Research reports that auction losses have declined significantly with the players introducing shorter tenure products of 3-9 months which constitute 90% of its portfolio now, as against its entire portfolio being of 12 months tenure earlier, with a maximum LTV of 75%, thus protecting itself from the fluctuation in gold prices. “Interest accrued on loans eased to 3% of loans as against an average of 7% over the past five years, the report stated. Additionally, interest accrued on loans with 3-6 months is lower than loans with tenor of 12 months, so interest recovery — even through auction — has been higher,” the report stated. Crisil report mentions that this is reflected in the balance sheet of the lenders, where the interest receivable has fallen to 3-4% of outstanding loans as on March 2017 compared with approximately 6% earlier.