Gold Loan

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A gradual shift from pawnbrokers to organized lenders by people who raise money against gold ornaments is expected to double the holdings of three specialized companies in the business to 200 tonne, or over a third of the 557.5 tonne held by Reserve Bank of India (RBI), by the end of the current financial year.

Nonbanking finance companies such as Muthoot Fincorp of the Muthoot Pappachan Group, which specialize in providing loans against gold, charge an average interest of 20-22% a year against 36-40% charged by usurious moneylenders.

Apart from lower rates of interest, NBFCs like Muthoot and Manappuram boast a processing time of as little as half an hour for loans up to Rs1 lakh against jewellery.

"The change in our holdings and an increase in loan book size are chiefly due to a shift of business from the unorganized to the organised market," said George Muthoot , Muthoot Pappachan Group.

“The rise in our gold loan portfolio is because of a gradual shift from unorganized pawnbrokers to the organized lending market."

However, he shied away from commenting on the increase in loan assets or gold holdings citing that his company was in a silent period prior to an initial public offering. The company expects to raise a reported Rs 1,200 crore from the public to meet working capital and capital adequacy requirements.

According to the central bank's annual report for FY10, the total holding of gold by the Reserve Bank stands at 557.75 tonne including a purchase of 200 tonne of gold from the IMF on November 3, 2009.

NBFC sources estimate the gold held by households in India at 20,000 tonne out of which 10%, or 2,000 tonne, is held by lenders across the country. "Of this 10%, only 25% is with the organized players including NBFCs and banks. So there is a great potential for the organized markets to grow.

The average ticket size of the loan is around Rs 30,000 and the tenure is normally up to a year. The attractiveness of the product lies in the absence of equated monthly installments - instead, the NBFCs charge the principal and interest component at the time of loan closure - and the non-levy of penalty for foreclosure of the loan. "The loan can be paid back any time during aperiod of one year with consumers normally closing the loan in about four months," said George Muthoot

The NBFCs deduct around 30% of the value of jewellery as security margin and ask consumers to top it up in the event gold prices fall. However, in a rising price environment, as has been witnessed over the past 10 years, a consumer can simply close an existing loan and take a fresh one to get more money against the pledged gold.

"Most of the people who can borrow from NBFCs using gold as a collateral are not too aware of this product," said Pankaj Mathpal, a certified financial planner. "But, to my mind, it is better for a person who has gold to use that as collateraland borrow from organized lenders instead of going in for a more expensive personal loan at 16-36%."

NBFCs like Muthoot and Manappuram, predominant in the south, have begun to extend their reach by setting up more branches.

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