When Latha Krishnan's 62-year-old father slipped and fell in the bathroom and fractured his ankle, she was distraught. She had just shifted from Chennai to Hyderabad and her husband hadn't joined her yet. She had neither relatives nor friends in the new city, did not know the place or language and did not have enough cash in hand to admit her father to a hospital; and she had lost her purse with the ATM card and credit card in it in Chennai two weeks earlier. Suddenly she remembered seeing an ad for Manappuram Finance's gold loan on TV. On enquiry with her neighbours she came to know that a Muthoot Finance office was two streets away. Pledging her two gold bangles of two sovereigns (32 gm), she got a cash loan of Rs 36,000 and admitted her father in hospital.

Loan against gold jewellery

This has been traditionally been the pawn brokers' forte, but banks, perhaps following in the footsteps of non-banking finance companies (NBFCs) such as Manappuram and Muthoot, are getting into the race fast.

The Reserve Bank of India, which gives data on car and home loans, does not give information on loans given against gold jewellery. HDFC Bank, for instance, says (without disclosing the base) that its gold loan book is growing by 100 per cent. And the public sector banks are setting up dedicated branches for issuing loans against gold.

A recent report from ICRA Management Consulting Services said that the organised sector's gold loan portfolio was Rs 27,802 crore in 2009-10, 72 per cent higher than in the previous year.

India largest consumer of gold

Lending against gold is nothing new in this gold-loving country. India is the largest consumer of gold in the world. A recent World Gold Council research paper estimates that India or Indians own over 18,000 tonnes of gold worth $800 billion which is 11 per cent of the global gold stock. The gold jewellery demand increased 67 per cent year-on-year to 272 tonnes in the first half of 2010.

Gold jewellery accounted for 75 per cent of the total Indian gold demand in 2009, the remainder being 23 per cent in investment and 2 per cent in industrial use.

But obviously, what has added lustre to this business is the epochal surge in the prices of the precious metal. Gold price per 10 grams was Rs 21,795 as on April 27, 2011, almost a 90 per cent jump in the last three years and has more than doubled in the last four years. The resultant increase in the value of the asset in the hands of the owner has obviously been a factor in spurring him or her to use it as a source of funding.

NBFC branding eye-opener

The credit goes to specialised NBFCs that provide loans only against gold jewellery such as Muthoot Finance and Manappuram. Two years ago these companies became very visible with television advertising, which led to the expansion of the market. These are short-term loans, usually for a tenure of three months for which the interest rates charged by NBFCs could range between 18 and 24 per cent on a daily basis. Banks charge a lower interest rate.

Two-three years ago, these companies began advertising on television. Manappuram, which roped in film stars to tell people to use the gold lying unproductively in the family lockers, has spent Rs 40 crore on advertising and marketing. V. P. Nandakumar, Chairman, Manappuram, said gold loans are called ‘bridge loans' as they are short-term, to meet contingency needs by traders. It also becomes a replacement for personal loans for people who need short-term cash, he said. This listed company had roped in Bollywood actor Askhay Kumar to get through to the North Indian market. Down South, it used national award winner Mohanlal for Malayalam, Vikram for the Tamil audiences and Venkatesh for Andhra Pradesh.

Muthoot Finance said it spent about Rs 35 crore in brand-building initiatives and advertisements, with cricketer Virender Sehwag promising that the loan will be through in just five minutes. Muthoot Finance is the first company in the financial service sector to sponsor an IPL team. In IPL Season 3 (2010), Muthoot replaced Hero Honda which had sponsored the Delhi Daredevils team from 2008. The players carry Muthoot's logo of two elephants in cap and jerseys. There has been a change in the mindset of customers opting for gold loans with borrowers being more open to pledging their jewellery and taking a loan against it to meet their financial requirements, said Biju Pillai, Executive Vice-President and Business Head - PL, Gold Loans, LAS & Home Loans, HDFC Bank. A decade or two ago people did not want to be seen in pawn shops pledging gold jewellery, which meant the family had fallen upon bad times.

NBFCs lead the way

NBFCs scored over banks on two fronts in spite of charging higher interest – quick approval in disbursal of loans and less documentation.

The business is so lucrative that even procedure-bound public sector banks, apart from opening ‘exclusive gold outlets' are making transactions pretty simple. “Gold loan in thirty minutes,” proclaims a banner that flutters outside an Indian Bank gold loan branch in Chennai. Indian Bank expects to open 15 such branches. S. N. Misra, General Manager, Indian Overseas Bank, says banks have long since offered loans against gold jewellery but did not see it as a promising segment. What has caused the banks to change now, says Misra, is that the “extraordinary initiatives” taken by the NBFCs were an “eye opener” to the ‘zero bad loans' portfolio. Earlier, it was the intimidating procedures and paper work of the public sector banks that drove people away from banks and into pawnbrokers' shops. IOB had the largest gold loan portfolio with Rs 5,500 crore in 2009-10. It plans to set up 25 exclusive branches for this purpose, this year.

Why did it take public sector banks to realise the potential of these loans if they had been offering them all along? It's like the difference between turning a Maruti Alto and a Tata truck; it takes that long to turn a bigger vehicle – like State-owned banks, quips Rajeev N. Mehra, General Manager – Financial Planning and Wealth Management, State Bank of India. But, now, NBFCs and banks both are gunning for gold.

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