By Stuart Burns
As a method of providing loans it has worked well, but its very popularity and pace of growth is a cause of concern for the authorities in India. We talk, of course, of gold loans.
In a country where the hoarding of physical gold is almost a way of life, it is not surprising that using that asset to raise money has proved popular. Indeed, turning to pawn brokers and loan sharks has always been an open avenue — sometimes the only avenue open — to the poor, but it is the rise of major finance houses and banks’ roles that is getting the Reserve Bank of India (RBI) worried.
A recent report by Citibank quoted in a Mineweb article estimates that the organized gold loan market was worth over $12 billion during 2010-11 and had been growing at a compound annual growth rate of 35 percent over the past five years. According the article, around 200 tons of gold was used as collateral to raise loans in India by November’s end and during the 2011-12 fiscal year.
The RBI is considering restricting the maximum interest that a gold loan firm can charge its customers, and the penalties that a gold loan firm can impose for late payment. Currently, these firms charge anywhere between 12 and 24 percent as interest, while penalties can be as high as 30 percent; but before you gasp in horror, bear in mind that a personal loan for a poor agricultural worker or farmer would be at rates of up to 36 percent and the processing takes much longer than one day – in terms of efficiency, this new breed of gold-loan finance has some merits.
To illustrate how this trend is developing, the RBI estimates 18 of the 26 public sector banks, including five associate banks of State Bank of India, have missed their agricultural lending targets for 2010-11.
The reason? Most, including State Bank, have diverted funds to facilitating gold loans. Two of the most successful gold finance firms, Muthoot Finance and Manappuram Finance, reported loan growth of 32 percent and 40 percent, respectively, for the year up to September 2011. As lenders stopped lending in the aftermath of the 2008/9 financial crisis, loans against gold took their place, with the asset proving both a rising one and easily liquidate-able if required.
But a separate article illustrates how difficult this trend may be to stop. Even the Indian state’s own largest lender, The State Bank of India, is seeking to lure customers from the country’s largest employer (and also state-owned) Indian Railways, with offers of cheap brokerage fees when buying physical gold. The bank hopes it will not only sign up thousands of new clients (SBI has only 40 percent of IR’s 1.44 million employees currently on its books), but secure the commission on gold sales and line up potential new clients to whom they can extend gold loans in the future.
The RBI is said to be looking at ways it can restrict the rate of interest charged to gold-loan clients and the setting a maximum loan-to-equity ratio, currently around 85 percent to maybe 70 percent. In itself, that may slow the growth, but with traditional loans taking so long to arrange and charging similarly exorbitant rates, there is not an obvious alternative open to the unorganized private borrower. Too light a hand by the RBI and they will hardly dent the relentless rise; too heavy and they could drive it underground where it will be impossible to regulate.
Either way, India’s love affair with gold looks set to continue.