Microfinance

Gold Loans – The new financial El Dorado ?

Gold loans(Loans given with  gold as collateral) in India have seen a major interest from corporates in the last one year. Many NBFC’s have begun to focus on this sector. Two kerala based NBFC’s Manappuram Finance and Muthoot Finance have expanded rapidly in semi-urban areas of South India and are now planning for an aggressive push into North India.

Manappuram, whose web site classifies it as the country’s largest listed and highest credit rated gold loan company, has seen a 15% year-on-year rise in the number of persons taking gold loans during the first six months of the current fiscal to 105,265, and a 28% increase in disbursals to Rs 2,105 crore.

Gold Loans

The Power of Gold -About 90 percent of the gold in India is owned by individuals -Pic Credit-reuters.com

Over the same period, Muthoot has clocked a robust 75% growth in the number of persons availing of gold loans at 35,000 and an 81% increase in the amount disbursed at Rs 9,091 crore.

The Washington Post has an exclusive article on Gold Loan Frenzy in India

In India, gold loans gain popularity as precious metal’s prices soar

NEW DELHI — With time running out, Praveen Garg scrambled to find the $6,000 he still needed to buy a fancy, five-bedroom apartment with a park view. But his relatives and friends refused him, and the bank turned him down for an emergency loan because he did not have the proper tax documents for his small shoe business.

Left with no other options, he did the unthinkable: He pawned his wife’s gold jewelry and his mother’s, an act many Indians consider a disgraceful sign of desperation.

“It was a very difficult decision. I had to swallow my pride like a bitter pill,” Garg said as he opened a red velvet jewelry box and handed his wife’s wedding bangles, necklace and earrings to a gold loan executive at a bank in New Delhi. “If people in my neighborhood find out, they will ridicule us.”

Though seeking a gold loan was culturally bold, Garg said it was more private than going to a neighborhood moneylender. Rest of the news article

An advertisement from Muthoot Gold Business Loan tries to downplay the stigma of pawning a wife’s jewels in the below video.

Link to Video

Video Interview with Mannapuram Group Chairman – V P Nandakumar

The Economic Times too has reported on this increase in Gold Loans- A big jump in disbursal of gold loans in India

However despite all the hoopla surrounding Gold Loans it seems it is not without it’s drawbacks as this DNA article states

Getting your gold’s worth of loan is tough

First, there are various types of financial services companies that offer loans against gold and the interest rates charged by them vary widely.

These include banks such as HDFC Bank, ICICI Bank, State Bank of India and its associates, Allahabad Bank, Development Credit Bank, etc. Then there are a host of cooperative banks that also offer these loans. There are also non-banking financial companies (NBFCs), which cannot take deposits of money from the public but can give loans. Major players in this category include south-based players such as Manappuram Finance and Muthoot Group.

The interest rates charged on loans against gold are lower than those charged for personal loans. For example, a leading private sector bank charges as much as 18% interest on personal loans, but gives loans against gold at 15.75% or less. Another bank charges 14.5-16.5% for personal loans and 12.5% for loans against gold jewellery.

Loans from NBFCs are typically costlier than those from banks. Muthoot, for example, gives loans at a fixed rate 33.6%. Do note the huge difference in the rates charged.

Secondly, the interest rate applicable varies depending on the quality of gold jewellery. If you have hallmarked jewellery, with a ‘BIS’ stamping by a hallmarked jeweller to indicate the purity of the gold used, the interest rate charged will be lower than on non-hallmarked jewellery. The difference could also be on the basis of carats of gold, whether 22 or 18, etc.

Remember, jewellery cannot be made of pure gold. Pure gold is available only in the form of gold coins and bars, which are not accepted by most banks and financers. The reason? People have an attachment to their jewellery rather than to gold coins or bars.

As the head of a leading NBFC told DNA, “If the value of gold falls below the loan amount, the borrower will never come back to free his gold. But if he has mortgaged his grandmother’s necklace, whether the price goes up or down, he will come back for it.”

Thirdly, the amount of loan you can get, even if the jewellery is hallmarked and of high quality, the loan amount would be much less than the jewellery is worth.

Also, the current price of gold — around Rs 16,785 for 10 grams — is not taken into account by all the banks, leave alone NBFCs.

Every bank would have its own method of calculating the value of the jewellery you offer to mortgage. Some banks fix the consideration price at a level (say Rs 1,005-1,215 per gram) for about 6-12 months and revise it only a year later, no matter what the actual market price of gold in the international markets is.

According to a recent forbes report on SKS Microfinance , PE Investors in SKS are pressurizing  SKS to venture into gold loans but the top management has managed to resist the pressure so far.

In light of these developments should MFI”s who give non-collateral based loans consider venturing into gold loans ?

Pawning a wife’s jewels is considered a last resort desparate move in Indian society.If you are going to pawn your wife’s gold for a business loan today then what are you going to do when there is an actual financial emergency ?

Also some business sectors have a high failure rate with 9 0ut of 10 new businesses failing within the first five years.Should you then be risking your gold assets by investing in a new business ?

What do micro finance practitioners feel about these developments ?

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