NBFCs, banks focus on shorter tenure gold loans to boost margins

A research report by India Infoline adds that the shift to shorter tenure products will help in ensuring a robust asset quality as the interest loss arising is limited

Banks and non-banking financial companies (NBFCs) are now looking at gold loans of shorter tenure (three to six months) unlike earlier when the duration used to be one year or more.

V P Nandakumar, managing director and CEO of Kerala-based Manappuram Finance explained the company’s decision to focus on shorter-term loans helped improve profitability. “This is because by focusing on short-term loans, our auction (of gold deposited by defaulting customers) could come down. And, this has been a great help as the losses arising out of lower auction has helped in protecting margins.”

Apart from protecting margins, these shorter duration gold loans also help companies by shielding them against the volatility in gold prices that get more pronounced in longer duration loans.

“Earlier, for a typical 12-month gold loan at 75 per cent loan- to-value (LTV), the total principal and interest would be 93 per cent of the value of gold, assuming 24 per cent interest rate. This meant the margin of safety in terms of collateral was very low. If the customer did not pay and it took about two months for the auction process to be completed, even a four per cent decline in gold prices in 12 months would result in losses for the company. Shorter tenure loans help de-link the business from gold price volatility,” says a research report by Motilal Oswal that believes shorter term-loans is a good strategy.

According to a research report by India Infoline, the shift to shorter tenure products will help in ensuring a robust asset quality as the interest loss arising is limited.

Not only NBFCs, but even banks are now looking at these shorter duration loans. Jose K Mathews, general manager, Federal Bank, explains that it is advantageous to consumers as well because the lenders can give a higher quantum of loans for a better rate.

“In a longer duration loan, you have to factor in the possible volatility and, therefore, you have to keep a margin to ensure that the LTV at any point does not breach the 75 per cent mark. But, in a shorter duration loan, the volatility is not that much of a concern.”

At present, most of the loans in the bank’s books are of longer tenure, but going ahead, the fresh loans would be mostly offered for shorter duration.