Banks witness rise in disbursal of gold loans

Earlier to take loan against gold was considered as social stigma, but now this has totally disappeared. Now people consider buying gold as their savings which can be used to raise funds for meeting urgent requirements. Women especially living in cities are becoming economically independent and take active part in the decision making process thus easily give their gold ornaments to avail loan against it.

Not only the people living in urban and semi-urban areas, even the farmers and rural folk are taking loan against gold ornaments as it is a simple process in comparison to long complex and expensive procedure involved in mortgaging property to get loan.

Recently a newly married couple was spotted at the South Delhi branch of a non-banking finance company that had come to take loan against the bride’s gold ornaments for their week-long honeymoon to Mauritius, the picturesque Indian Ocean Island that lies east of Madagascar. Regarding this bride’s logic was that as she is not going to wear all of the ornaments she has received during her wedding, so they have decided to take loan against the jewelry for the trip. Both the newly-weds are well-employed therefore they will return the principle along with interest within a month of receiving their salaries.

From the above instance it is clear among the Indian middle and upper middle classes the resistance for gold is fading away also because of the record price rise of the yellow metal, which in turn has led to increase in disbursals of such loans mainly by NBFCs such as 122-year-old Kochi-based Muthoot Finance.

George Alexander Muthoot, managing director, The Muthoot Group , which claims to be the country’ s largest lender against gold stated, “Apart from the price rise, the social stigma earlier attached to gold loans has almost totally disappeared and they are now widely recognized as acceptable means of raising funds for meeting urgent requirements by all segments of society”. According to a staffer from an NBFC people thinking attached to pledging gold has changed due to Hindi film industry and serials which has inexorably portrayed women parting with their gold as a deep tragedy.

Now more and more people are taking loan against gold to finance their children’s education, particularly for meeting donation demands, which a bank will not entertain, car purchases, holiday trips or even to put up margin money for a home buy as the
tenure of such loans is typically up to three or six months.

Also taking loan against gold is more advantageous than taking personal loans as the interest rate on such loans is low (Muthoot, for instance, has a base rate of 13% while banks are known to charge PLR + 200-400 bps — a bp is one-hundredth of a percentage point — for personal loans, which could work out to as high as 15-16% on an annualized basis), non-penalty for pre-payment, hassle-free documentation and speedy disbursal of the loan.

Anil Rego, CEO of Bangalore-based financial planning firm Right Horizons says, “Borrowing against their gold jewellery is an option that individuals falling in the middle-income category are increasingly looking at”. “The primary reason is that the gold rate has shot up, and, second, they are realizing that the interest rate is lower than unsecured loans. In addition, the cash crunch arising out of the global slowdown has resulted in people considering this option.”

although NBFCs such as Muthoot and Manappuram are most popular avenues for gold loans than banks, as banks lack their gold assessing capabilities, but according to a senior PSU banker this year banks have witnessed a rise in disbursals as well as the number of accounts.

Manappuram, whose web site classifies it as the country’s largest listed and highest credit rated gold loan company, has witnessed a 15% year-on-year increase in the number of persons taking gold loans during the first six months of the current fiscal to 105,265, and a 28% increase in disbursals to Rs 2,105 crore. During the same period, Muthoot has saw a robust 75% increase in the number of persons taking gold loans at 35,000 and an 81% increase in the amount disbursed at Rs 9,091 crore.

HDFC Bank, a private lender is also actively promoting gold loans, has seen its business grow by over 60% year-on year in this segment. “There has been a change in the mindset of customers opting for gold loans with borrowers being more open to pledge their jewellery and taking loans against the same to meet their short-term financial requirements,” reiterates Biju Pillai, business head (PL, LAS, GL, Home Loans), HDFC Bank.

According to AC Mahajan, CMD, Canara Bank, “The recent spurt in the prices of gold has increased the eligible amount of loan and helped in boosting agri loans against the pledge of gold. Such loans are primarily used for composite needs of raising crop and meeting consumption needs, which are normally given by way of kissan credit card”.

The amount of loans disbursed by NBFCs such as Muthoot and banks such as HDFC bank ranged from Rs 50,000 to Rs 3-4 lakh and Rs 25,000-10 lakh respectively. Mr Muthoot while confirming said, “The higher the per gram rate the higher is the interest rate and vice versa on the advance”. In this the banks and NBFCs to be on safe side also keep a reasonable margin in the event of non-payment of interest by the borrower.

In this fiscal year through October standard gold of 99.5% purity prices has averaged Rs 14,903 per 10 gm so far, up 21% from the average rate of Rs 12,349 in the year-ago period. The rise has followed the international rate, which last week had hit a record high of $1070.40 an ounce due to a steadily weakening dollar due to the mounting deficit in the US and increased fund deployment in riskier assets across the globe in light of easy monetary policies.