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7
September 2017
 |
Gold (The Total Investment & Insurance Solutions)
Profitability
of large gold loan financiers has surged to peak levels seen before 2012, with
rejuvenated business model like periodic collection of interest on the loans
and lowering of product tenures, says a research report.
In the
report, Krishnan Sitaraman, Senior Director, CRISIL Ratings, says, “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.”
According
to the report, Fiscal 2017 saw return on assets zoom to over 4% from around
2.5% for fiscal 2014 for gold loan companies, which had seen such profitability
levels till 2012. The Total
Investment & Insurance Solutions
Earlier,
gold loans had a tenure of one year and were repaid in one bullet repayment
along with interest. The borrower had the option to repay the loan any time
before maturity, and over 80% of borrowers repaid the loan before six months. The Total Investment & Insurance
Solutions
"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. This is reflected in the balance sheet,
where the interest receivable has fallen to 3-4% of outstanding loans as on
March 2017 compared with about 6% earlier," the ratings agency says.
As per
CRISIL, other key reason for improved profitability of gold loan companies is
the shortened loan tenure. It says, "Increasingly, loans are disbursed
with tenures of three to nine months as against 12 months earlier. This enables
the gold loan financiers to react swiftly to any decline in gold
price."
Under
the norms from Reserve Bank of India (RBI), gold pledged by delinquent
borrowers can be auctioned only on following the due regulatory process. A
shorter maturity period helps the lender auction the gold sooner, if the need
arises. The Total Investment &
Insurance Solutions
“A
one-year tenured loan with a provision for repayment at any time and without
the requirement of periodic interest payment provides high flexibility and
convenience. The structural change of shorter tenure products being attempted,
to an extent, takes away this very convenience that had
contributed
to the product’s popularity. Therefore, a fine balance of risk management and
customer-orientation holds the key to sustained growth in business and
profitability,” says Ajit Velonie, Director, CRISIL Ratings.
In
addition, interest accrued on loans with three to six months is lower than
loans with tenor of 12 months, so interest recovery – even through auction –
has been higher. This is reflected in the fact that large gold loan companies
have seen a 2-5% increase in their interest yields in fiscal 2017 compared with
the previous year. The Total Investment
& Insurance Solutions
"While
the growth in gold loan business will continue to be moderate, efforts by the
large gold loan financiers to diversify into other lending segments - housing,
microfinance and vehicle financing - will help broad base the business and
mitigate the risks arising from mono line gold loan business," the ratings
agency concluded.The Total Investment
& Insurance Solutions
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