With frequent hikes in key rates by the Reserve Bank of India and subsequent upward revisions in interest rates by banks and financial institutions, personal loans have become costlier. Individuals going for personal loans have to shell out more money towards interest cost depending on the loan amount and the risk profile. Small traders and borrowers in the middle income group prefer taking loans by pledging their gold jewellery with banks to meet their funding requirements.
As pawn-brokers charge exorbitant rates of interest, people seeking loan turn their attention to banks and finance companies in the organised sector to meet their funding needs. The organised gold loan market in India is estimated at Rs. 40,000-45,000 crore with South India accounting for more than 85 per cent. At this level, gold loan portfolio translates into 1.2 per cent of the value of total gold stock in India, indicating that the market is under-penetrated. With Indian households possessing a significant amount of gold in the form of ornaments and jewellery, finance companies find gold loan business lucrative.
The gold loan market is largely concentrated between two categories of lenders, namely, the south-based NBFCs specialised in gold loans accounting for 32 per cent of total market and scheduled commercial banks holding 58 per cent. The balance portfolio is constituted by several small state and central co-operative banks.
With gold prices hitting the roof, borrowers are also able to get more loan amount by pledging their ornaments. They also feel safe to keep the ornaments with such loan companies to save charges if these are kept in safe deposit lockers of banks. Of course, these loans are for shorter time ranging from 6 months to 12 months. Some borrowers redeem the jewellery and re-pledge the same to enjoy the loans for an extended period.
Some borrowers use the loan amount to buy ornaments again as they see some gain in one year with the sharp upswing in gold prices.
While banks offer up to Rs.10 lakh as gold loan, non-banking finance companies offer even upto Rs. 1 crore depending on the creditworthiness of borrowers. The interest rate depends on the loan-to-weight ratio. For example, for 60 per cent of the value of gold, NBFCs charge 12-13.5 per cent per annum.
Besides scheduled commercial banks and co-operative banks, non-banking finance companies such as Muthoot Finance, Manappuram Finance play a key role in disbursing loans against gold jewellery.
These Kerala-based finance companies are expanding their presence by opening a large number of branches, especially in the South, and creating employment opportunities.
These NBFCs lend only against household jewellery. The average size of the loan is between Rs. 25,000 and Rs. 33,000 and the average period is 75-90 days.
In fiscal year 2010-11, Muthoot Finance and Manappuram Finance have collectively paid Rs. 408 crore as tax to the Exchequer.
