Loans against gold jewellery gain pace

The business of loans against gold jewellery has become a priority for many financial institutions.

Many have chalked out mega retail spread plans, especially in Tier-III and Tier-IV cities, to ensure more gold loans, especially to farmers. Manappuram General Leasing and Finance and The Muthoot Group, the leading non-banking finance companies in this sector, have announced addition of 500-600 new branches by the next year.

Private sector banks, like the country’s largest co-operative one, The Saraswat Co-operative Bank Ltd (SCB), and HDFC Bank, have plans to intensify facilitation of loan against gold jewellery. SCB is currently giving such loans through 10 retail branches, which it plans to increase to 100 by the end of 20111-12. HDFC also proposes to increase its footprint in this segment, on a big scale.

“Retail gold loan against jewellery, a small part of our Rs 25,000-crore business, will prosper in the coming years as we plan to lay more emphasis on this sector. In the next five years, we want our business (both deposits and advances) to grow to Rs 50,000 crore, with proportionate increase in the gold loan segment,” said Ekanath K Thakur, chairman of SCB, which offers a gold loan at 13.5 per cent for a one-year period.

Traditionally, farmers mortgage gold to avail money to buy high-yielding seeds during the kharif and rabi sowing seasons. They repay the loan during harvesting seasons by selling their output. So, without losing any inherent asset or opportunity to produce high-agri output, they get additional income through extra yield after borrowing funds from organised and unorganised financiers.

Kerala-based Manappuram has grown phenomenally in the past two-three years. The loan book position surged nearly 150 per cent to Rs 6,000 crore this year.

“There is enough scope for more and more players in this sector to create awareness about this short-term loan, in which we offer up to 90 per cent of the value of jewellery, at up to 18 per cent of interest. We charge no pre-payment penalty. Also, interest is charged only for the period the loan is availed for. Hence, entry of more players will encourage customers to opt for this short-term loan without hassles,” said V P Nandakumar, chairman of Manappuram, which has 12 per cent of the market in the overall gold jewellery loan business.

If you consider the estimated 20,000 tonnes of gold held by individuals and 10 per cent of it is coming for mortgage, then the total loan book position should be Rs 400,000 crore. The industry has not penetrated even 10 per cent of that. Hence, immense of opportunity lies ahead for new players, said George Alexander Muthoot, managing director of The Muthoot Group, the market leader, with nearly 22 per cent share.

Public sector banks have got backing from the government-owned agricultural financing bank, National Bank for Agriculture and Rural Development (Nabard). They offer an interest rate of 7.5-8 per cent. But, customers’ footprints would depend upon the trust one has built over the years, Nandakumar said.

HDFC has started gold jewellery loan offerd from remote branches. According to Biju Pillai, executive vice president, the bank considers a variety of factors like the type of ornament and customer profile for disbursal. Having entered this segment in 2004, HDFC Bank avails a loan with an interest rate of 10-15 per cent, depending on the loan amount and overall relationship.