India’s gold loan business in doldrums as yields drop by 30%

NEW DELHI (Scrap Monster): The yields on gold lending have dropped considerably during recent years. The returns which stood at 4.4% over the past several years have now dropped substantially to nearly 3%. Consequently, many large gold financing companies have been forced to shut their operations, reduce their exposure to gold loans or even diversify themselves into other related business portfolios.

Cholamandalam Investment and Finance Company, Magma Fincorp and Capital First are a few among the companies that have winded up their gold loan business recently. Meantime, Shriram City Union has reported huge drop in business during recent years. Also, Muthoot- the largest player in the country has reported tepid growth for its gold loan segment.

The drastic cut-down on gold lending by banks in the country had resulted in robust growth of gold loan business by Non-Banking Finance Companies (NBFCs). These NBFCs used to charge high interest rate on gold loans. However, restrictions imposed by the Reserve Bank of India (RBI) with respect to gold lending norms hurt their business. The Loan-to-Value ratio was brought down from 90% to as low as 60%, which was later raised to 75%. The drastic cut in LTV has resulted in reduced loan per unit, which has made the loan unattractive for normal customer. In addition, the yield on gold has fallen to almost 3%. Moreover, RBI imposed a cap of Rs 1 lakh for gold loan transactions by NBFCs.

With gold prices declining, it makes economical for the customer to default on repayment, as the value of repayment often exceeds the worth of pledged gold. For instance, Muthoot’s bad loans have surged to 2.19% in 2014 when compared with 0.41% a few years before. As the number of defaulters increase, gold loan companies are even forced to auction their gold holdings.