Change in business strategy help gold loan companies improve profitability

Lowering of product tenures and periodic collection of interest have helped gold loan companies such as Muthoot Finance  and Manappuram regain their profitability levels before the regulatory tightening since 2012, observes a recent research report from Crisil. In fiscal 2017, gold loan companies saw return on assets zooming to over 4 percent from around 2.5 percent for fiscal 2014.

In the last two years, these companies had brought in a new business model through periodic collection of interest on the loans and lowering of product tenures. Earlier, gold loan companies used to give loan for a year and were repaid in one bullet repayment. The borrower was allowed to repay the loan anytime within a year and 80 percent of the customers used to repay within six months.

The declining gold prices in the past two years forced these companies to start collecting interest at periodic intervals than waiting for maturity of the loans and this is reflected in their balance sheet improvement, noted the research agency.

According to Krishnan Sitaraman, senior director, Crisil, this has ensured the loan to value ratio remain intact and gold price declines do not result in interest loss, which was the key reason for reduced profitability in the preceding few years. "It also reduces the chances of delinquency as the borrower's equity in the pledged gold does not reduce", he said.

Shortened loan tenure of 3-9 months as against the previous one year period also increased the profitability, says the report.

India's largest gold loan company Muthoot Finance had gold loans under management worth  Rs 27,775 crore by the end of June-17 quarter. The company also recorded a historic net profit of 30 percent growth during the quarter, at Rs 351 crore as against Rs. 270 crore in the previous year corresponding quarter.

Its main competitor Manappuram Finance disbursed gold loans worth Rs 11,124 crore in FY17. Manappuram had consolidated revenues of Rs 854 crore for the June-FY18 quarter, 13.86 percent higher as compared to Rs 750 crore in the corresponding previous year quarter. Net profit for the period was Rs 155 crore, 3.72 percent less than the Rs 161 crore in the corresponding previous year quarter. Equities research firm Ashika's analysts had point out Manappuram changed its strategy by introducing shorter tenure products of 3-9 months which now constitute 90 percent of its portfolio now, as against its entire portfolio being of 12 months tenure earlier, with a maximum Loan to Value of LTV of 75 percent, thus protecting itself from the fluctuation in gold prices. Customers are also benefitted as if it is a three month loan, interest charged is as low as 7.5 percent.