Profitability of large gold loan firms surges

Profitability of gold loan financiers has surged back to the peak levels seen before the regulatory tightening that started in 2012, according to rating agency CRISIL.

FY18 saw return on assets rise to 4 per cent from around 2.5 per cent for FY14. The gold financing industry that comprises players such as Manappuram Gold Finance and Muthoot Gold Finance, had seen low profitability since 2012.

The profitability levels were on the rise since early 2014 due to players revamping their business model — by collecting interests on loans periodically and lowering product tenure. Earlier, gold loans were of one year and were repaid in lump sum, along with interest.

A decline in gold prices, however, forced gold loan companies to collect interest from borrowers at periodic intervals, without waiting for loan maturity. Following this, interest receivable on outstanding loans fell 3-4 per cent as of March 2017, compared with 6 per cent earlier. Krishnan Sitaraman, senior director, CRISIL Ratings, said: “Periodic interest collection has ensured the loan-tovalue ratio remains intact and gold price declines do not result in interest loss.”

The shortened loan tenure enabled gold loan financiers to react swiftly to any decline in gold prices. Such loans are disbursed with tenure of 3-9 months, against 12 months earlier. Major gold loan companies have seen a 2-5 per cent year–on–year increase in their interest yields in FY17. This was aided by ease in auctioning of gold pledged by delinquent borrowers, with shorter maturity period and reduction in interest accrued.