Hyderabad: With her sister’s wedding just two weeks away in May, Jomol Mathew
needed to raise Rs1 lakh in a hurry to pay for the wedding expenses. A
middle-class homemaker from Perumbavoor, in Ernakulam district of Kerala, she
approached a local branch of Manappuram Finance Ltd on the advice of a friend
and, overcoming initial qualms, pledged 80g of gold in return for the money she
“I did not have to go through the kind of lengthy and tedious formalities the
regular banks mandate for taking a loan,” Mathew, who is in her late 20s, said
in a telephone interview from Perumbavoor. “Another big advantage is the time
taken for the loan process. Within minutes, I got the cash.”
From Perumbavoor to Patna, borrowers such as Mathew in need of emergency
funds have in recent years been increasingly turning to gold loans, attracted by
the liquidity and convenience they offer—minimal paperwork and almost
instantaneous access to cash after the metal passes purity tests.
According to a report by Icra Management Consulting Services Ltd, the
organized gold loan market in India—the world’s biggest consumer of the
metal—grew at a compounded annual growth rate (CAGR) of 40% between 2002 and
2010, and is poised to expand 33-41% in 2011. The value of gold stock in India
has grown at 22% CAGR in 2002-2010, according to Icra Management Consulting
Quick cash: An employee of Manappuram
Finance evaluates the jewellery for loan against gold at the bank’s Paharganj
office in New Delhi. Ramesh Pathania/Mint
“It is a tool of financial inclusion and is very important to a country
like India where most of the families hold gold in some quantity at least,” said
V.P. Nandakumar, chairman of Thrissur-based Manappuram Finance, which went
public in 1995 to become India’s first listed provider of gold loans and was
joined on the stock exchange in May this year by its bigger competitor Muthoot
Finance Ltd, which also has its roots in Kerala, after a Rs900 crore initial
Together, Manappuram and Ernakulam-based Muthoot held a combined 165 tonnes
of gold stock as of the end of March—around one-quarter of the 615 tonnes parked
in the vaults of the Reserve Bank of India.
There is still vast room for growth in gold loan assets in a country where
privately held stocks are estimated by the World Gold Council at between 15,000
tonnes and 20,000 tonnes—the value translating to the equivalent of nearly 60%
of India’s gross domestic product (GDP). The price of physical gold, which has
been scaling records internationally, gained 16.15% to Rs2,135 per gram at the
end of June from Rs1,838 per gram a year earlier, according to
Goldpriceindia.net, which tracks gold market trends.
To be sure, the concept of gold loans is not new. State-owned banks have had
the product in their loan portfolio although it hasn’t been a priority. The
unorganized sector— pawn brokers in the cities and towns and money lenders in
the villages—have dominated gold lending, often charging usurious rates.
Only 10% of privately held gold in the country is in the loan market. Of the
10%, only around 25% is in the organized market with the rest being in the hands
of pawn shops and money lenders, according to Icra Management Consulting’s “Gold
Market report 2010”.
But the success of Manappuram and Muthoot in recent years is attracting other
finance companies to the business. Cholamandalam Investment and Finance Co.
Ltd (CIFCL) is set to enter the gold loan business, the Business Standard
had reported on 6 May.
The financial services arm of the Mahindra Group last year started offering
loans against gold ornaments. Reliance Commercial Finance Pvt. Ltd, a
part of Anil Ambani-owned Reliance Group, has launched a variant—giving loans
against units held by investors in the gold fund of Reliance Mutual Fund.
Besides households, gold lenders are trying to tap a new market in a country
where gold jewellery has traditionally been salted away in family vaults to be
passed on from generation to generation as heirlooms rather than a funding
source, according to some analysts.
Creating new customers
“Gold, in spite of its high commodity value, was always an unproductive asset
kept at home,” said Harsh Vardhan Roongta, chief executive officer of Apna
Paisa Pvt. Ltd, an online provider of information on loans.
“Gold financing NBFCs (non-banking financial companies) are targeting a new
segment of customers who otherwise would not have taken a gold loan,” he said.
“For instance, businessmen who want to start a new business venture now approach
gold financing companies.”
The leaders in gold loans are stepping up their own expansion plans.
“More than 60% of our branches are in rural and semi-urban areas, where local
money lenders and gold pawn brokers dominate the market. We are still expanding
our business there,” said George Alexander Muthoot, managing director of the
Muthoot Group of companies, in a telephone interview.
Muthoot Finance posted a net profit of Rs493 crore last year, up 117% from
the previous year. According to its website, the company had loans outstanding
of Rs15,728 crore at the end of the last fiscal, notching up 114% annual growth.
It has around 3,000 branches across the country.
“We are trying to make the business more transparent and convenient, in a way
that it caters to the needs of even the upper middle class in the country,” said
George Muthoot, who at the time of the company’s listing in May predicted that
the rising price of gold would boost the borrowing power of gold owners and
benefit his company.
Manappuram Finance, which has 2,565 branches across India, posted a net
profit of Rs283 crore in the last fiscal, up 135% from the year before, and had
loans outstanding of Rs7,500 crore. The company, which tripled its loan assets
in the last fiscal, plans to expand its presence in rural and semi-urban areas,
said Nandakumar. According to World Gold Council reports, two-thirds of the gold
demand in India comes from the rural agricultural sector.
“In spite of the tight liquidity problems in the market and the overall
economy slowdown, we expect to register a 60% growth in revenues this year,”
The rising demand for gold loans is partly driven by the convenience factor.
The companies say processing time is five minutes. The loan is sanctioned and
disbursed once staff check the weight and assess the value of the gold after
gauging purity. At the time of taking a loan, customers need to submit identity
proof, which is mandatory under the know-your-customer rules. There is no other
formality to be met.
The ease of transaction partly offsets the interest that gold lenders charge,
which is higher than that levied by commercial banks. State Bank of India, the
nation’s largest lender, charges 13.5% per annum on gold loans. At Manappuram
and Muthoot, depending upon the loan to value of the gold, the rates vary
between 12% and 24%. Local money lenders charge 36% on average for gold
According to the finance companies, gold loans are the safest mode of
lending. More than the commodity value, the emotional attachment the borrower
has with the metal makes gold the safest collateral.
“Manappuram’s defaulted loans (non-performing assets) have never gone beyond
0.25% of the total loan. Last year it was just 0.18%,” said Nandakumar.
According to V.A. Joseph, managing director and chief executive officer of
South Indian Bank, gold loans are not prone to risks caused by fluctuations in
the value of the metal. Lenders typically advance 70% of the value of the
collateral, leaving themselves a margin of safety. The short-term nature of gold
loans— which could have a tenure as brief as a week—also offers lenders
protection against price volatility.
Gold financing growth has been promoted by heavy advertising. Manappuram, for
instance, counts among its celebrity brand ambassadors, Bollywood actor Akshay
Kumar and South Indian actors Mohanlal, Venkatesh and Vikram.
“The rapid advertising has helped the company to grow a lot,” Nandakumar
Gold lenders may need to invest more to expand more rapidly in markets where
they still have a limited presence; they still do a lion’s share of their
business in the south.
“The existing markets for NBFCs are getting saturated. To grow further, they
should break into new markets in the west and the north of the country,” said V.
Sriram, chief general manager, Icra Management Consulting Services. “This will
require a lot of market development activities as the concept needs to be sold
in these market. They have already started this.”
According to Sriram, the growth will have to come from taking market share
from unorganized money lenders, which calls for more intensive marketing in
interior and rural locations.
“This will increase their cost of operations, but can be a good growth
opportunity,” he said.