Niche For Gold LoansNiche For Gold Loans

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India's formal gold loan market is India's formal gold loan market is growing at 30 to 40 percent annually growing at 30 to 40 percent annually and attracting global interest. Abu and attracting global interest. Abu Dhabi Investment Authority and a Dhabi Investment Authority and a Goldman Sachs fund are among Goldman Sachs fund are among investors in Muthoot Finance, India's investors in Muthoot Finance, India's largest specialist gold lender, which largest specialist gold lender, which starts trading on Friday after a starts trading on Friday after a popular $200 million IPO. popular $200 million IPO.

The opportunity is clear: Indians have The opportunity is clear: Indians have traditionally used gold as a store of traditionally used gold as a store of wealth and hold 10 percent of the wealth and hold 10 percent of the global supply, much of it in jewellery. global supply, much of it in jewellery. At the same time, more than half of At the same time, more than half of Indian adults operate outside of the Indian adults operate outside of the formal financial sector, according to formal financial sector, according to the Reserve Bank of India. the Reserve Bank of India.

The risk for the industry is that high The risk for the industry is that high interest rates and margins and the interest rates and margins and the potential excesses of accelerating potential excesses of accelerating competition will draw a regulatory competition will draw a regulatory backlash of the sort that has crippled backlash of the sort that has crippled India's once-soaring microfinance India's once-soaring microfinance sector. sector.

Although gold is currently trading at Although gold is currently trading at more than $1,500 an ounce and hit a more than $1,500 an ounce and hit a record $1,575.79 on Monday, a record $1,575.79 on Monday, a plunge in gold prices would erode the plunge in gold prices would erode the value of collateral held by lenders value of collateral held by lenders and undermine demand as borrowers and undermine demand as borrowers receive less cash. receive less cash.

The short loan tenors involved in The short loan tenors involved in gold loans mitigate risk. The longer gold loans mitigate risk. The longer the term, the lower the loan-to-value the term, the lower the loan-to-value ratio, which is typically 75 percent ratio, which is typically 75 percent for three months. for three months.

"You're just taking a call on three "You're just taking a call on three months. It's not like you're doing a months. It's not like you're doing a home loan for 20 years and you've home loan for 20 years and you've got to live with the property," said got to live with the property," said Amit Saxena, chief executive of Amit Saxena, chief executive of Karvy Finance, a unit of one of India's Karvy Finance, a unit of one of India's biggest brokerages, which entered biggest brokerages, which entered the gold loan business last year. the gold loan business last year.

Gold loans are safe if branches are Gold loans are safe if branches are secure and the lender properly secure and the lender properly appraises the collateral, which can appraises the collateral, which can be liquidated in case of default. be liquidated in case of default. Sentimental value means default Sentimental value means default rates are low. rates are low.

Non-performing assets accounted for Non-performing assets accounted for less than half a percent of Muthoot's less than half a percent of Muthoot's retail loan book in recent years. Its retail loan book in recent years. Its gold loans stood at $2.9 billion at the gold loans stood at $2.9 billion at the end of November, about six times end of November, about six times their total in March 2008, a listing their total in March 2008, a listing document showed. document showed.

Others ramping up gold lending Others ramping up gold lending include Reliance Capital, controlled include Reliance Capital, controlled by billionaire Anil Ambani, and M&M by billionaire Anil Ambani, and M&M Financial Services, part of the group Financial Services, part of the group that controls top utility vehicle maker that controls top utility vehicle maker Mahindra & Mahindra. Mahindra & Mahindra.

They compete in a fragmented They compete in a fragmented industry with the likes of specialists industry with the likes of specialists Muthoot Finance and No.2 player Muthoot Finance and No.2 player Manappuram General Finance and Manappuram General Finance and Leasing, banks such as South Indian Leasing, banks such as South Indian Bank Ltd, and unregulated Bank Ltd, and unregulated moneylenders that charge more. moneylenders that charge more.

Organised firms control only one-Organised firms control only one-quarter of an Indian gold loan market quarter of an Indian gold loan market worth $50-$60 billion, according to worth $50-$60 billion, according to Ambit Capital. Ambit Capital.

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