The Dangling Carats

Why Gold Loan NBFCs Are In The Spotlight

• High interest rates charged by the NBFCs, which can vary from 12% to 28%
• Most loans for 3-6 months, defaults in repayment fetch a heavy penalty
• RBI limits loan to 60% of ornament value to ensure NBFC viability
• New KYC norms expected to bring accountability. But may deter clients.
• Last year, RBI barred NBFCs from seeking 'priority sector' bank loans, nipping one avenue of cheaper funds
• The central bank’s moves may either nudge gold loan-seekers towards traditional money-lenders, or banks, feel market observers

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The NBFCs’ promise of being more expedient and less curmudgeonly than regular banks, while offering better security and lower interest rates than the village money-lender, has struck a chord with loan-seekers. In the last decade, the explosive growth of NBFCs enthused even the banks to jump into the fray. Today, both together hold about 800 tonnes of gold. But, that’s still just a fraction of the tonnage of the yellow metal that Indians hold. According to rough estimates, the Indian public hoard is about 20,000 tonnes. As expected, India’s two listed gold loan companies have struck, well, gold. During the last fiscal, Manappuram Finance doubled its net profits from the previous year, while Muthoot Finance has recorded phenomenal growth rates, 133.49 per cent and 116.25 per cent, for the past two financial years running.

Looking at this unchecked growth, the RBI last month introduced a slew of safeguards for NBFCs. In this system, they can lend only up to 60 per cent of the gold’s loan-to-value (LTV) ratio against the earlier practice of doling out anywhere between 65 and 95 per cent of the gold’s value and charging interest rates as high as 22-26 per cent. Rating agency CRISIL feels the lowered LTV ratios will boost the asset quality of gold loan firms. “The regulations protect gold loan companies from the remote possibility of a unidirectional and sudden drop of up to 40 per cent in gold prices over a 3-6 month period, the usual tenure of gold loans,” says Nagarajan Narasimhan, director, CRISIL.

Last year, the RBI deprived gold loan firms of their priority sector status, increasing their cost of borrowing. A few NBFCs had used this route to obtain cheap funds, while continuing to provide gold loans at high interest. The RBI claims the paid-up capital of non-deposit-taking NBFCs as on March 31, 2011, was Rs 40,591 crore while bank borrowing (including foreign investment) was Rs 1,48,519 crore.

Muthoot Finance MD George Alexander Muthoot finds it unfair that banks are not governed by the same rules. “Due to our high visibility, we have managed to wean customers away from unauthorised money-lenders. I feel all our good work will come to naught if they start to flow back.” He shrugs off the RBI directives, saying growth will slow down to 20-25 per cent. “We give 60,000 loans per day and only 0.05 per cent is delayed debt. Bad loans are at a minimum since we take only jewellery and there is sentimental value attached to it,” he says.

Falling between the respectable banks and the usurious pawn-broker, NBFCs have had a tough task overcoming the “blade company” label (companies that provide loans at steep interest rates and, in crisis, disappear with deposits).

Welcoming the RBI measures, Abheek Barua, chief economist, HDFC Bank, says, “Some controls were definitely required to see that the credit these companies were creating was backed by adequate credit-checking measures. Many NBFCs have been aggressive in garnering business. In comparison, banks have much more robust credit-checking systems.”

Over the past decade, several gold loan companies, Kerala-based all, have managed to gain the much-needed patina of respectability and raise huge capital via banks and non-convertible debentures. Muthoot Finance’s website spells it out: the firm’s net worth ending September 2011 was Rs 2612.03 crore. In 2011, Forbes Asia magazine had Muthoot Finance chairman M.G. George Muthoot and his three brothers listed among the hundred richest Indians. The acceptability cake had been topped with some royal icing.

However, another RBI directive—to follow the stringent Know Your Customer norms, including proof of address—has raised fears of borrowers being nudged back to the village money-lender. An estimated 1,500 tonnes of gold reside in the unorganised sector money lenders and small unauthorised finance companies.

Dinesan T.S., of Tripunithara, Kerala, who routinely helps poorer applicants acquire loans, says the regular banks refuse to sanction loans for gold in smaller amounts like 500 milligrammes. “Banks take all day to process a loan and require that one be an account-holder too. This is where the NBFCs have scored.” Concurs Thomas John Muthoot, cmd, Muthoot Fincorp, “Most of our customers are from middle- and lower-income groups. The minimum loan amount we give is Rs 1,000 and it is largely based on the price of gold on that particular day.”

If, on the flip side, you trip up and cannot repay the loan, you then pay a dear price. There are cases where the borrower has lost all the gold. Sunita, a poor housewife in Kochi, had taken a loan for her husband’s medical treatment after pledging six sovereigns of gold. She got Rs 50,000 under a 3-month scheme from a local finance company. Unable to repay the loan, Sunita is worried. “Over three months ago, I got a notice to pay nearly Rs 63,575. I wish now that I had sold the jewellery instead of taking the loan.”

Today, both Manappuram and Muthoot have been banned from accepting public deposits through their subsidiary companies. “The RBI’s notification largely refers to the acceptance of deposits by Muthoot Estate Investments (MEI), and not by Muthoot Fincorp Limited. MEI is primarily engaged in the development of hotels, real estate projects and power generation,” says John Muthoot.

With the RBI’s contrarian stance, MEI has stopped accepting public deposits. A Manappuram Finance official statement asserts that “the company hasn’t accepted deposits from the public since March 22, 2011, in compliance with their status. They have also proceeded to recall the gold loans to enforce the RBI directive”.

The banks are keeping close watch. “We are expecting a substantial shift to regular banks for loans. Processing may become faster in the banking sector to meet the demand,” says Jagdeesan T.S., chief general manager, Federal Bank. While it may seem as if NBFC golden schemes are at risk of losing their sheen, they aren’t licked yet. Not with superstars pitching for them. The prospect of a Mohan Lal or Akshay Kumar swaying undecided minds can’t be discounted.

By Minu Ittyipe in Kochi with Arti Sharma in Mumbai