The gold finance firms in the country are making handsome business even at the time when loan defaults are increasing day by day. Loan defaults are rising in the industry following which the non-banking finance companies (NBFCs) have reduced their lending and hence made it difficult for the borrowers to avail personal loans.
At the same time increasing prices of gold in the past one year have made the situation favourable for most gold finance companies that have been extending cash against gold. In fact industry sources tell that these firms face a lower level of default as compared to their competitors in similar business.
A Kerala-based NBFC, Manappuram Group mainly deals in gold finance and its Chairman, VP Nandakumar says, "Gold loans have particularly been good in the past year, with banks being more cautious about offering personal loans to customers."
He further added that, "Even delinquencies in the gold loan schemes are negligible because we lend against household jewellery."
Ananda Bhowmik, Senior Director, Fitch Ratings, said, "When a person borrows to buy a scooter or a car, he accepts the idea of his vehicle taken away in case he is unable to pay off his loan, but if he has pawned his family gold ornaments to take a loan, then he thinks twice before not paying back."
Ever since liquidity crunch started in September banks have been hesitant in lending to the NBFCs. These companies were also pressed by the Mutual funds to return the borrowed capital because investors were claiming heavy redemptions. Although the banks have now eased their lending but are still cautious in extending funds to NBFCs and even if they are lending to them, an additional interest of around 2% is charged by them.
On the other hand gold finance companies are not facing any problems in raising finds from the banks. Mr Nandkumar told that, "More than 85% of the loan portfolios are below Rs 50,000 and micro-credit is a priority sector. So, bank lending to us has not declined." His company has not witnessed any drop in its gold loans demand despite of shifting around 50% of the cost to the consumer.
Gold loans are provided for an average tenure of about three months with interest rate charged between 18% and 24% on per annum basis.
The overall market for lending against gold is large but the organized gold finance industry constitutes a very small fraction of that market. Mr Bhowmik feels that gold loans are gaining acceptance with time and businessmen will enter the industry thus making it challenging for gold finance companies to offer loans with increased ticket sizes.