The very nature of its business makes investors like the loan against gold business. The risk factors seem fairly low compared to the opportunities and growth prospects. Listed companies in this space received investments from even private equity investors. Things could hardly have been better for these companies. However, over the last few quarters everything seems to be going wrong for these companies, and all the so-called positives seem to be getting neutralised, if not turning negative.
Let us look at some of these changes. Lending by banks to gold loan companies (GLCs) were treated as priority sector lending and therefore, these companies were enjoying loans at concessional rates. These low rates helped them earn huge net interest margins (NIMs).
Public sector banks have also been lending against gold jewellery. Actually, they have also lent against gold, coins and so on. The reason people go to GLCs is the next-to-nil time they take in disbursing loans. There is an allegation against these companies that, in their zest to disburse loans quickly, often they do not undertake proper due diligence and hand out loans against stolen jewellery, too. Typically, GLCs lend up to 80 per cent of the value of gold, making customers a happy lot. However, last month, the Reserve Bank of India (RBI) reduced the loan-to-value for GLCs to 60 per cent of the gold content.
Many of these GLCs have multiple names under which they do business. These companies accept cash deposits through group companies with presence in the shops/outlets from where the loans are handed out. This led to two issues. The first was the case of mistaken identity of the company for the customer, who thinks he is giving a deposit to the gold loan company. The second: that these NBFCs, classified as non-deposit taking entities, were in fact taking the deposits. RBI, then prohibited these companies from accepting deposits at these outlets.
GLCs would charge interest rates upwards of 20 per cent, even up to 30 per cent, while in the case of public sector banks, it would be less than half, or 12-13 per cent. The banks are happy with these loans as these are of short duration, have more than adequate security and in today’s times, are more or less risk-free.
The know-your-client (KYC) norms need to be followed by GLCs and banks alike. While in the case of a bank, the possibility of a walk-in customer not getting a loan is high. Typically, to get a loan you would have to go to a bank with which you have an existing relationship. Not so with a GLC. You could walk into any branch of a GLC, and get a loan. The system is quite lax and loans are easy to get.
GLCs’ television ads show bundles of notes being exchanged across the counter in lieu of gold jewellery, while in banks there are restrictions on cash withdrawals from one’s own account. It is expected that changes to this situation would be introduced shortly.
The microfinance business has taken a beating. The hype created around the initial public offering, and thereafter, of SKS Microfinance, is still fresh in the minds of investors. Gold prices have touched lifetime highs in India, thanks to a depreciating rupee. However, RBI is concerned about the future of GLCs if gold prices were to soften in India. Gold prices are softer abroad by about 12 per cent.
Finally, the periodic tapping of the bond market by GLCs to raise resources is also worrying, and does not help the cause of GLCs.
The writer is founder, KRIS Research