Sheen back on profitability of big gold loan financiers
Mumbai-India (Sept 10) Rejuvenated business models adopted by large gold loan financiers increased their profitability paving way for them to recover from a slump that followed regulatory tightening in 2012, according to a rating agency.
Fiscal 2017 saw return on assets zoom to more than 4% from about 2.5% for fiscal 2014. “These companies had seen such profitability levels till 2012,” said Crisil.
The improvement started with the players making two major changes to their business model in early 2014 — periodic collection of interest on the loans and lowering of product tenures.
Earlier, gold loans had a tenure of one year and were repaid in a single instalment along with interest. The borrower had the option to repay the loan any time before maturity and more than 80% of the borrowers repaid the loan before six months.
However, in the past couple of years, forced by a decline in gold prices, these companies started collecting interest from borrowers at periodic intervals without waiting for loan maturity.
“This is reflected in the balance sheet, where the interest receivable has fallen to 3-4% of outstanding loans as on March 2017 compared with around 6% earlier,” Crisil said in its report.
Interest collection
“Periodic interest collection has ensured the loan-to-value ratio remains intact and gold price declines do not result in interest loss, which was a key reason for reduced profitability in the preceding few years,” said Krishnan Sitaraman, senior director, Crisil Limited. It also reduces the chances of delinquency as the borrower’s equity in the pledged gold does not reduce. The other reason for improved profitability is the shortened loan tenure. Loans are disbursed with tenures of 3-9 months enabling financiers to react swiftly to any decline in gold price.
Under the RBI norms, gold pledged by delinquent borrowers can be auctioned only byon following the due regulatory process. A shorter maturity period helps the lender auction the gold sooner, if the need arises.
Additionally, interest accrued on loans with 3-6 months tenor is lower than loans with tenor of 12 months, so interest recovery – even through auction – has been higher. This is reflected in the fact that large gold loan companies have seen a 2-5% increase in their interest yields in fiscal 2017 compared with the previous year.
“A one-year tenured loan with a provision for repayment at any time and without the requirement of periodic interest payment provides high flexibility and convenience,” said Ajit Velonie, director, Crisil Ratings.
According to him, the structural change of shorter tenure products being attempted, to an extent, takes away this very convenience that had contributed to the product’s popularity. “Therefore, a fine balance of risk management and customer-orientation holds the key to sustained growth in business and profitability.”
While the growth in gold loan business will continue to be moderate, efforts by the large gold loan financiers to diversify into other lending segments — housing, microfinance and vehicle financing — likely to help broadbase the business and mitigate the risks arising from monoline gold loan business.
TheHindu
