How Gold Loans have Become a Risk to Lenders Muthoot and Manappuram ?
The recent sharp correction in gold price has raised concerns on the business models of gold loan NBFCs (Muthoot and Manappuram)
with stocks falling 24-33% over the last 10 days. Among banks, South Indian (22%) and Federal (9%) have high gold loan exposure.
How does Gold Loan Lending Work in India ?
Gold loans are usually personal loans with gold jewellery as collateral. The normal LTV is 60% on value of jewellery (which normally works out to ~70% of gold by weight excluding peripherals like making charges, etc.). Interest rates charged by NBFCs tend to be in the 20-25% range (banks lend lower at 12-15%), with tenure of the loan ranging from 3 months to a year. The payment is usually in the form of a lump-sum (principal+interest) at the end of the tenure. The loans are usually of small ticket size (less than Rs100,000, average Rs40,000). The important characteristic of this business is that lending is done purely on the collateral, without taking onto account the income of the borrower or Credit Report & History.
The two specialised gold loan companies have grown at a strong rate of 50-60% CAGR over the last three years (to Dec-12). Some banks have grown their gold portfolios at rates in excess of 100% recently (Federal Bank, Corporation bank, Central bank of India, etc).
Recovery of Gold Loans from Indian Borrowers
The companies regularly ascertain the LTV of the portfolio at the existing prices, and upon breach of certain LTV limits initiate a recovery process (including an auction if the customer does not respond to a notice).
Manappuram Finance has recently started taking monthly interest payments. Management explains that this could limit the loss on
interest, while principal can be recovered from the auction sale.
Further, the banks (SIB, Federal) do not actively solicit gold loan customers, but offer these products to existing customers of the banks (often these are liability customers). The risk of default from such customers is low, explain management.