NBFCs readying to trap the gold bug

KOCHI: Trust the strong public belief that gold is the best hedge against inflation to further push active stockpiling of the yellow metal. But only a trickle is reaching the organized gold loan market-precisely 1.5% to 2% of India's 18,000 to 20,000 tonnes stockpile of gold (which is 10% of the world gold stock). Hence, non-banking finance companies (NBFCs) and banks which have entered the gold loan market recently are getting more aggressive, targeting new customer bastions to widen their exposure.
While gold prices have been on an upward trajectory, disbursal of loans against gold was always limited largely to the rural areas. But NBFCs say that salaried professionals are increasingly entering the mix as the semi-urban and middle class segments realize the convenience of gold-based loans. According to Dinesh Gupta who works with a leading bank, "Bank loans always made me think twice as credit risk is higher. The paperwork was cumbersome and interest rates were not competitive. But with gold loans, procedures have become easier. I receive the loan amount the same day and can retrieve my ornaments with equal ease the moment I repay the loan." Salaried professionals make up almost 80% to 90% of the semi-urban and middle class groups opting for gold loans. George Alexander Muthoot, MD of leading gold financier Muthoot Finance which had a gold portfolio of 130 tonnes as of Dec 31, 2011, says that salaried class currently comprises only 10% to15% of his customer base. "But our customer profile is slowly changing as we increase our exposure to the salaried class. If NBFCs and banks, who are entering the gold loan space, are to increase their assetsunder management, the urban middle class will provide the next level of growth," Muthoot said.
Banks and NBFCs today hold a 50:50 share of the Rs 1 lakh crore gold loan market. HDFC Bank, which stepped into the business about four years ago, has seen its gold loan portfolio double in fiscal 2011. From 2007-11, aggregate gold loans for Muthoot Finance and Manappuram Finance increased at compounded annual growth rate of 70% and 197%. respectivelyven as both firms are tapping funds to aggressively expand in the eastern and western parts of the country. The gold loan market is not an easy business to be in, says Thomas Muthoot, director of financial products company Muthoot Fincorp. "It is a huge retail activity. DYou can't mechanise or automate it as it is very skills-intensive iversifying the customer profile is the challenge and the goal to aim for. With increasing customer awareness, we will build the market and improve margins further," he noted.
Analysts believe NBFCs will have to offer loans with interest rates in the 12-14% range instead of 18-24% if they are to be competitive with banks. "If prices fall, the transaction costs would become too difficult to bear for the customer. Nevertheless, gold as an asset class is always a buyer's market. But I doubt if piling up huge quantities of gold makes sense from an investment perspective," says Alex Babu, MD of research firm Hedge Equities.