NBFCs Guard Their Golden Turf Despite Tough RBI Code
KOCHI: Kerala-based finance companies are expected to continue dominating the Rs 1.25 lakh crore gold loan market, staving off competition from commercial banks even though the Reserve Bank of India (RBI) relaxed rules for the latter last month.
Muthoot Finance, Manappuram General Finance, Muthoot Fin Corp, Mini Muthoot and Kosamattom Finance have all mastered the art of selling gold loans in their home market Kerala, which consumes 20 per cent of total gold sold in the country, long before commercial banks entered the lucrative market in early 2000s.
RBI allowed commercial banks to lend as much as they want per customer, provided the loan-to-value ratio is 75 per cent, the rules on par with non-banking finance companies. Earlier, there was a cap of Rs 1 lakh per customer for commercial banks. However, local finance companies would not be impacted due to their better business model, said industry officials. Quick loan approvals and disbursal with minimal documentation, greater accessibility due to better penetration, servicing of non-bankable customers, better operating cost structure and convenient hours of operation allow gold loan companies compete better with commercial banks.
Gold loan companies are growing at a healthy clip of 20-40 per cent, though the growth used to be at 100-150 per cent per annum till 2010, a year which saw the RBI tightening rules for gold NBFCs.
“Kerala is a unique market. Customers are comfortable dealing with local gold loan companies compared to the upscale environs of a commercial bank,” said Jairam Sridharan, senior vice-president for consumer lending and payments at Axis Bank. Gold loan firms charge higher interest rates - 14 to 20 per cent versus 13 to 14.5 per cent by commercial banks, but they are able to easily lure customers in rural and semi-urban areas from the clutches of pawnbrokers and moneylenders, who charge sky high interest rates.
Still, unorganised gold loan market, where lending is dominated by pawnbrokers constitute 75 pc of the gold loan market, indicating huge untapped potential for gold NBFCs and commercial banks.
Muthoot Finance (134 tonnes), Manappuram Finance (46 tonnes) and other Non-banking Financial Companies (NBFCs) have with them possession of gold jewellery and ornaments to the tune of nearly 300 tonnes, taken as collateral from borrowers. Indian central bank Reserve Bank of India’s (RBI) bullion holding is about 600 tonnes.
“Financial services is a relationship based business and our 15 lakh customers will continue to do business with us irrespective of change in rules,” said Kapil Krishan, CFO of Manappuram Finance, which has nearly 3,300 branches.
The central bank’s move would, however, help monetise part of 18,000 tonnes of gold lying idle with Indian households for more productive purposes.
It is reckoned that nearly 65 per cent of household gold holdings in rural markets. The reach by the likes of Muthoot Finance, which has over 4,400 branches across the country, will help them to tap this growing market.
“RBI’s view to maintain the loan-to-value for bank’s gold loans for non-agricultural end uses is a fair one and it shows that the regulators want to shape up this emerging sector for long term giving level playing field to all players,” George Alexander Muthoot, MD of Muthoot Finance, said.
One key outcome from the RBI’s new rules would be that more traders and small businessmen would approach banks for gold loans, said Thomas George Muthoot, director of Muthoot Pappachan Group.
“About 75-80 per cent of our gold loan borrowers are traders or small businessmen and only 10 per cent take loan for consumption purposes,” he said.