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With the Reserve Bank of India (RBI) increasing the loan-to-value (LTV) ratio for gold loan companies, borrowers can secure loans of up to 75 per cent of the value of the gold jewellery pledged, against 60 per cent earlier. Thomas John Muthoot, chairman and managing director of Muthoot Pappachan Group, believes the move reflects the central bank’s confidence on gold loan non-banking financial companies. In an interview with Somasroy Chakraborty, he says while higher LTV provides an opportunity to expand the gold loan portfolio, the lender will remain cautious, given the volatility in gold prices. Edited excerpts:
How will you benefit from RBI’s decision to increase the LTV ratio for gold loan companies?
It is a positive move for all gold loan NBFCs in the country. Not only does it give us an opportunity to increase our business, it also sends a strong message that RBI isn’t against gold loan companies. In the last 12 months, a number of new measures were announced to regulate gold loan companies. The general feeling was RBI was uncomfortable with the functioning of such NBFCs. The decision to increase the LTV ratio will rebuild the lost confidence.
But if gold prices fall, a higher LTV will increase the stress on your credit quality.
We have learnt our lessons from the price volatility in the past. We will be extremely cautious in lending. Also, at this point, not many new players are entering the sector. Earlier, when some new players entered the market, LTV ratios went up to 85-90 per cent. The situation is different now; the competition is less intense. This will allow us to operate in a range of 65-75 per cent LTV. We will offer loans at lower LTV to first-time customers; 75 per cent LTV will be allowed only to our best-rated customers.
What is the average size of your loans?
The average size is Rs 35,000-40,000. Usually, customers are given a year for the repayment. But most of these loans are for emergency purposes and are taken only for short periods. Therefore, about 60 per cent of the loans are repaid within 90 days.
RBI has mandated gold loan NBFCs must give a certificate on the purity of gold. But many were apprehensive of this, stating it was difficult to arrive at the proximate purity. What are your views?
We don’t have an option, but to give a certificate to customers on the purity of the pledged gold. But we will put sufficient caveats to protect ourselves against disputes on redemption. Our legal team is working on this. Also, we have decided we will not lend if the purity is less than 22 carats. If the jewellery is of lower purity, it has to be valued proportionately. These loans are generally small and it does not make sense to reduce the ticket size further.
RBI has directed gold loan NBFCs to conduct the auction in the same town or taluk in which the branch that had extended the loan is located. Will this increase your cost of operations?
There will be no new infrastructure requirements. But we will need more people and arrange for logistics. Also, we will have to conduct the auctions in a staggered manner in taluks, as there may not be enough participation.
What are growth targets for 2013-14 and 2014-15?
We have seen some improvement in business only in the last quarter. So, growth will be more or less flat this financial year. I don’t want to commit any number for the next financial year; if the situation improves, we might grow 15-20 per cent.