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Business News » India News

Gold loan cos profit surge on better collection, small tenure

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Updated: Thu, Sep 07, 2017
03:19 pm
PTI
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Gold loan financiers have seen a rise in their profitability recently with return on assets improving to over 4 per cent in fiscal 2017, helped by better collection of interest and due to shorten loan tenure, says a report.

The gold loan companies had seen this rise in their profits till 2012.

"Profitability of gold loan financiers has surged back to the peak levels seen before the regulatory tightening, starting 2012, eroded returns. Fiscal 2017 saw return on assets zoom to over 4 per cent from around 2.5 per cent for fiscal 2014," rating agency Crisil Ratings said in a report here today.

The jump in profitability of these players increased after they changed their business model-periodic collection of interest on the loans and lowering of product tenures in early 2014.

The report said in the past couple of years, forced by a decline in gold prices, these companies have started collecting interest from borrowers at periodic intervals without waiting for loan maturity.

This is reflected in the balance sheet, where the interest receivable has fallen to 3-4 per cent of outstanding loans as on March 2017 compared with near 6 per cent earlier.

"Periodic interest collection has ensured the loan-to- value ratio remains intact and gold price declines do not result in interest loss, which was a key reason for reduced profitability in the preceding few years," the rating agency's senior director, Krishnan Sitaraman, said.

It also reduces the chances of delinquency as the borrower's equity in the pledged gold does not reduce.

Gold financiers also improved profitability with the shortened loan tenure.

Increasingly, loans are disbursed with tenures of 3-9 months as against 12 months earlier.

"This enables the gold loan financiers to react swiftly to any decline in gold price," the report said.

The RBI norms allows gold loan financiers to auction gold pledged by delinquent borrowers only after following the due regulatory process.

A shorter maturity period helps the lender auction the gold sooner, if the need arises, the report said.

The rating agency said while the growth in gold loan business will continue to be moderate, efforts by the large gold loan financiers to diversify into other lending segments - housing, microfinance and vehicle financing - will help broad base the business and mitigate the risks arising from mono line gold loan business.

 

(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)

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