By Archana R Nair
Apart from being a major commodity and a safe haven for investors, the yellow metal has maintained a more closer relation with the Indian population as its high value provided loans, which has been a traditional immediate solution for cash. Maintained by money- lenders the sector remained unorganized for centuries, but over the time it transformed into a major business area, although the traditional banks was not that successful in establishing themselves.

The gold loan market in India is around Rs. 3 trillion, in which non banking financial companies account for Rs. 50,000 cr, also the same occupied by commercial banks. Another Rs. 2 trillion still remains In the unorganized sectors driven by private money lenders. South India dominates the gold loan market in the country.

The rapid growth rate of the non banking financial companies, particularly in south India, became a cause of worry for Reserve Bank of India(RBI), which made them issue norms in March 2012, according to which a LTV(loan to value) ratio of 60% has to be maintained. The key points from the RBI’s latest guidelines for NBFCs include transparency in interest rates, due diligence in understanding the repayment capacity of the borrower, awareness of his existing debts, explicit loan agreement etc. RBI has also raised the capital requirement of the companies from 10% to 12% from April 2014.

The total asset size of gold loan companies reached to a high at Rs 445.1 bn, an increase of 712% in two years ended on March 2012.

The growth in advances is mainly contributed by two companies Muthoot and Manappuram, which recorded a growth of 114% and 244% to Rs15,728 cr and Rs 6,349 cr respectively in 2010-11. It raises significant concentration risk with more than 90 per cent of the loan assets being collaterised by one product which is the gold jewellery , according to the central bank.

The success of the NBFCs lie on their USP that includes scale, first mover advantage, brand equity, accessibility, relatively lower documentation and fast turn around time, which helped them to outperform other commercial banks like Federal Bank, HDFC Bank, ICICI etc, as pointed out by the survey research by Edelweiss. The report says that large gold loan companies like Muthoot Finance or Manappuram would be able to tide over the regulatory turbulence facing the industry due to their sheer size and branch network.

Moreover, according to Edelweiss Securities, every 25% decline in gold prices can impact the earnings of gold loan companies by 15–20%.

On the contrary, the RBI norms have hindered the growth rate of NBFCs, as revealed in the report, uncertainty around the regulatory turmoil has led to an earnings downgrade of 18-.27% by the Street for Manappuram and Muthoot since March 2012, thereby leading to 15%-30% underperformance of these stocks. Furthermore, the companies have muted their expansion plans and expect modest growth numbers for FY 2013.

With the new norms the NBFCs could provide only 60 % of the gold value, which is a blow to their acceptance. In order to sustain they may reduce the interest rate, which adversely effects the profit margin. Although the quick loan processing agenda of the banking companies will benefit them.

As the NBFC gold loans become unattractive, this makes the right time for the commercial banks to expand their gold loan portfolio, provided they become less aggressive in their loan policies. As long as the consumer acceptance for gold loans prevails, and the loan requirements increase as part of higher standard of living, the banks gets a good field to grow themselves in gold loan market. They could gain as there existed tight competition in the market. But still they have less influence in the rural and semi urban areas.

Banks like Federal Bank, Indian Overseas Bank, Indian Bank expressed interest in expanding their gold loan portfolio. An instance would be the Federal bank's quick move which says savings account is not necessary for acquiring gold loans. South Indian Bank, State Bank of Travancore, Andhra Bank are also among the PSU banks that offer loan against gold jewellery.

The working group chaired by KUB Rao to study about gold lending by NBFC, appointed by RBI,is expected to submit its report by end of July 2012. The panel studies practices of NBFCs involved in lending against gold, assess trends in demand for gold loans and study how it influences gold imports, among other things. The report may further influence the gold loan companies.