Sailesh Yadav, a kirana store owner in Mahabubnagar district, Andhra Pradesh, frequently pledges gold with loan companies to meet short-term finance needs. Early this year, a banner advertising a public sector bank’s gold loan offer caught his attention at the weekly market. He found that the interest rate charged by the bank was significantly lower than what the non-banking finance companies (NBFCs) and pawn brokers charged.
“Given that it was a public sector bank, I wasn’t worried about losing my gold. With private players, you’re always nervous till the gold is back in your hands. And since the interest on offer was also lower, why think of any other?” says Yadav, explaining why and how he became a PSU bank customer.
Yadav’s switch does not surprise the men extending the money. “Although, we (PSUs) have been offering gold loans in Tier II and III towns for a while, we were not actively seeking customers. Now, attempts are being made to create awareness about our offerings aggressively,” says R K Dubey, executive director, Central Bank of India, which is targeting 20-25 per cent growth in its gold loans business this financial year.
Adds M Narendra, CMD, Indian Overseas Bank, “Attractive interest rates, accessibility to customers, trust in the brand and very little documentation are adding to the growth of our gold loans portfolio.”
The recent RBI missive tightening gold loan norms for NBFCs, in order to curtail rising risks, has thrown open an opportunity for PSUs. The RBI had asked banks to reduce their exposure to NBFCs that have gold loans as 50 per cent or more of total financial assets. It also capped the amount that NBFCs can lend against gold, or the loan to value (LTV) ratio, at 60 per cent. “This gives us an opportunity to tap the potential. And banks are trying to disburse more in this segment,” says Ajai Kumar, CMD, Corporation Bank.
Typically, NBFCs like Muthoot Finance, Muthoot Fincorp and Manappuram Finance, which do not take deposits but offer loans, borrow funds from banks at a nominal interest rate of about 12 per cent. Keeping operational costs in mind, they in turn charge their end-users 16-25 per cent. The PSUs, on the other hand, charge between 12 and 15 per cent for gold loans.
According to industry estimates, the gold loan market in India is worth Rs 3 trillion, of which Rs 50,000 crore each is with NBFCs and commercial banks.
The remaining amount is with the unorganized market (money lenders). While banks lend 60-65 per cent of the gold’s face value, NBFCs lend 60-85 per cent and pawnbrokers go up to 100 per cent. Usually, these are short-term loans with a tenure of upto 12 months.
Bankers see a huge potential in the gold loans business and are going all-out to get a slice of the pie. For instance, State Bank of Hyderabad seeks to double its `650 crore gold loans portfolio this fiscal. “We offer gold loans at all our branches. We expect a sizable growth from the rural areas as 25 per cent of our new centres will be set up in tier II and III cities as per RBI’s mandate,” explains M Bhagavantha Rao, managing director, SBH.
The banks may be bustling but the NBFCs do not seem perturbed. “The opportunity is huge. For banks, gold loans are just one of their products, while for us, it’s the major product offering. This allows us to offer superior service and innovate from time to time,” says V P Nandakumar, chairman, Manappuram Group.
Outlining their strengths, he says, NBFCs have a wider footprint, offer loans in a matter of minutes and operate beyond banking hours. “Our processing time is just five minutes per loan on an average. Whereas banks take nothing less than half-an-hour,” explains John Muthoot, CMD, Muthoot Fincorp. Also, while banks charge low interest, they have a limitation in terms of loan size. The ticket-size for banks is between Rs 6,000 and Rs 1 lakh, whereas NBFCs offer Rs 1,000-Rs 1 crore loans.
That might change though. Not only are the banks working to reduce processing time, they are also doing away with processing charges and offering zero prepayment penalty on gold loans. “Currently, it takes time to sanction a loan for non-clients. For those with savings accounts, the process will take just 5-10 minutes, putting us at par with NBFCs,” says B A Prabhakar, managing director, Andhra Bank.