Profitability of gold loan financiers has surged back to the peak levels seen before the regulatory tightening, starting 2012, eroded returns. Fiscal 2017 saw return on assets zoom to over 4% from around 2.5% for fiscal 2014. These companies had seen such profitability levels till 2012.
The improvement started with the players making two major changes to their business model in early 2014 – periodic collection of interest on the loans and lowering of product tenures.
Earlier, gold loans had a tenure of one year and were repaid in one bullet repayment along with interest. The borrower had the option to repay the loan any time before maturity, and over 80% of borrowers repaid the loan before 6 months.
However, in the past couple of years, forced by a decline in gold prices, these companies have started collecting interest from borrowers at periodic intervals without waiting for loan maturity. This is reflected in the balance sheet, where the interest receivable has fallen to 3-4% of outstanding loans as on March 2017 compared with ~6% earlier.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Periodic interest collection has ensured the loan-to-value ratio remains intact and gold price declines do not result in interest loss, which was a key reason for reduced profitability in the preceding few years. It also reduces the chances of delinquency as the borrower’s equity in the pledged gold does not reduce.”
The other key reason for improved profitability is the shortened loan tenure. Increasingly, loans are disbursed with tenures of 3-9 months as against 12 months earlier.
This enables the gold loan financiers to react swiftly to any decline in gold price. Under the RBI norms, gold pledged by delinquent borrowers can be auctioned only on following the due regulatory process. A shorter maturity period helps the lender auction the gold sooner, if the need arises.
Additionally, interest accrued on loans with 3-6 months is lower than loans with tenor of 12 months, so interest recovery – even through auction – has been higher. This is reflected in the fact that large gold loan companies have seen a 2-5% increase in their interest yields in fiscal 2017 compared with the previous year.
Says Ajit Velonie, Director, CRISIL Ratings, “A one-year tenured loan with a provision for repayment at any time and without the requirement of periodic interest payment provides high flexibility and convenience. The structural change of shorter tenure products being attempted, to an extent, takes away this very convenience that had contributed to the product’s popularity. Therefore, a fine balance of risk management and customer-orientation holds the key to sustained growth in business and profitability.”
CRISIL, in July 2016, factoring the improved business model and expected improvement in profitability, had upgraded the ratings of two large gold loan financiers.
While the growth in gold loan business will continue to be moderate, efforts by the large gold loan financiers to diversify into other lending segments - housing, microfinance and vehicle financing - will help broad base the business and mitigate the risks arising from mono line gold loan business.