Ashok Vishwakarma, a government employee in Dhar, Madhya Pradesh, needed Rs 25,000 for an emergency at home. Banks would have asked for a variety of documents, so he rushed to a Muthoot Finance branch. He kept some gold jewellery as security and took home Rs 25,000 in 15 minutes. “I didn’t want to run after banks for a personal loan,’’ the 52-year-old says. On January 5, he repaid the principal to take back the jewellery.
Vishwakarma joined millions who over the last couple of years, across metros as well as small towns such as Tiruchy in Tamil Nadu and Jabalpur in Madhya Pradesh, have resorted to “gold loan”, ensuring non-banking finance companies do a roaring business.
Thrissur-headquartered Manappuram Finance that set its foot in Madhya Pradesh two years ago now has 73 branches with a turnover of Rs 150 crore. Kochi-based Muthoot Finance has over 50 branches with a Rs 250-crore business.
Industry studies reveal that between 2002-10, the gold loan business posted a compounded annual growth rate of 35-40 per cent. On the back of a sizzling 36 per cent jump in gold prices, the business boomed last year and is estimated to have doubled in size to Rs 75,000 crore in 2011.
However, even this may be off the mark. “The exact growth rate and total business could not be assessed due to the involvement of local moneylenders and unlicensed firms, which are lending gold loans at three times higher rate than the organised sector,” V P Nandakumar, Chairman of Manappuram Finance, said.
People in urgent need of money prefer to tap non-banking finance companies like Muthoot and Manappuram who turn out loans in double quick time with little or no paperwork. The sustained rally in gold prices has only fuelled this risky but convenient method of minimal documentation.
The average size of gold loans with Muthoot, Manappuram and other NBFCs in rural areas and tier-2 and tier-3 towns is about Rs 10,000 to Rs 20,000. People are taking loans against gold to pay hospital bills, bear wedding expenses and education bills.
Even private sector banks have started cashing in. “Our gold loan business has doubled in the last 12 months. We have already become number one among private sector banks,” said an official of HDFC Bank, refusing to give details.
While commercial banks and NBFCs (mainly two Muthoot companies and Manappuram) control approximately 58 per cent and 32 per cent of the market share respectively, the remaining 10 per cent is held by small cooperative banks and others. Indian Overseas Bank and Indian Bank are leaders among the public sector banks.
Loans are instantly approved, with companies charging between 12 and 24 per cent interest and offering a maximum loan of Rs 2,450 per gram on 24-carat gold and a maximum of Rs 2,055 for 22-carat jewellery. “Loan in 5 minutes,” says the website of Muthoot Finance, India’s largest gold loan company with over 3,000 branches at a time when borrowers who approach banks have to wait several days to get loans sanctioned after submitting several documents.
In Kerala, Muthoot Fincorp, another leading NBFC run by another branch of the Muthoot family, doesn’t even ask you to fill out an application form. Anyone walking into the outlet with a copy of their voter’s ID card can pledge the gold and walk away with the loan within an hour.
“Gold has a lot of sentimental and emotional value. We don’t rush to auction it in case of default and give the customers the maximum period of 18 months,” says Muthoot’s Dhar branch manager M P Sharma, who retired from a public sector bank.
In 2011, Indians — known to traditionally accumulate gold — imported nearly 1,000 tonnes of the metal, which today has a market value of Rs 2,80,000 crore. The unprecedented gold rally over the past two years — up 63 per cent — has catapulted the total value of India’s gold holding — estimated at around 18,000 tonnes by the World Gold Council (WGC) — to around Rs 50,00,000 crore ($1 trillion). This is around 90 per cent of India’s total market capitalisation of all listed shares on the stock exchanges, making India’s gold market almost as big as the stock market.
WGC says that gold demand in India is expected to grow by over 30 per cent in real terms during the next decade, driven by rapid GDP growth, urbanisation, the emergence of a strong middle class and a sustained and potentially rising savings rate of 30-40 per cent of income.
The improving finances of firms in the “gold loan” business, therefore, is no surprise. Muthoot Finance’s assets under management (AUM) stood at Rs 15,870 crore on March 31, 2011, up from Rs 1,450 crore in March 31, 2007 — 11 times in four years.
In two years, the gold loan business of Manappuram Finance has shot up 1,500 per cent. Its AUM stood at Rs 6,370 crore during the year ended March 2011 against Rs 400 crore in March 2009. “Our income from services increased at a compounded annual growth rate (CAGR) of 146.34 per cent from the fiscal year ended March 2008 to the fiscal year ended March 2011. In this same period, the value of loans advanced by us against pledged gold increased at a CAGR of 302.20 per cent. Our number of branches grew from 644 in 14 states and Union territories as of March 2009 to 2,192 branches in 22 states and Union territories as of May 2011,” says the offer document of Manappuram Finance to float non-convertible debentures.
Muthoot Finance’s network has expanded from 373 branches on March 31, 2005, to 3,274 branches on September 30, 2011, comprising 589 branches in northern India, 2,114 branches in southern India, 422 branches in western India and 149 branches in eastern India covering 20 states, the national capital territory of Delhi and four Union territories.