The borrower previously had the option to repay the loan any time before maturity, over 80 per cent of which was repaid before 6 months. However, a decline in gold prices forced these companies to collect interest from borrowers at periodic intervals, instead of waiting for the loan to mature. Lenders have been following this practice since the past couple of years. The interest receivable has since fallen to 3-4 per cent of outstanding loans as on March 2017, as compared to the earlier figure of 6 per cent.
Krishnan Sitaraman, Senior Director, Crisil ratings, said: “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. It also reduces the chances of delinquency as the borrower’s equity in the pledged gold does not reduce.”
The other key reason for improved profitability is the shortened loan tenure, enabling the gold loan financiers to react swiftly to any decline in gold prices. Increasingly, loans are disbursed with tenures of 3-9 months as against 12 months earlier. Shorter maturity periods allow lenders to auction gold pledged by delinquent borrowers sooner. The Reserve Bank of India has issued guidelines to regulate borrowings in this respect.
Major gold loan companies have seen a 2-5 per cent year–on–year (YoY) increase in their interest yields in FY2017, also aided by a reduction in interests.
Ajit Velonie, Director, Crisil ratings, said: “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. 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.”
The growth in gold loan business is expected to be moderate and efforts by the large gold loan financiers to diversify into other lending segments like housing, microfinance and vehicle financing should help broad base the business and mitigate the risks arising from mono-line gold loan business.