Profitability of gold loan financiers has surged back to the peak levels seen before the regulatory tightening.
“Profitability of gold loan financiers has surged back to the peak levels seen before the regulatory tightening, starting 2012, eroded returns,” said Crisil in a report. “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.
In early 2014, gold finance companies had made two major changes to their business model such as 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. Also, loans disbursed are 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,” said Crisil.
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.
“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,” said Ajit Velonie, Director, CRISIL Ratings. “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.”
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, said Crisil.