NBFCs, BANKS STRIKE IT RICH WITH GOLD LOANS

According to a study by ICRA Management Consulting Services, organised lenders such as NBFCs and Commercial Banks shown growth at a compounded annual growth rate of around 38% in the period from 2002-2009 and expected to grow at an annual rate of 35-40% over the next three years.


In absolute terms, the gold loan market is estimated to have grown around 10 times from about Rs 2,500 crore in FY 2002 to around Rs 25,000 crore in FY 2009.



The USP (unique selling proposition) of these NBFCs is that they offer high loan to value ratio (75-80 per cent) and minimal documentation. With assayers being attached to each branch, they can approve and disburse loans (in cash) in an hour or two.
Banks are viewing gold loans as a safer means to meet priority sector lending norms and also as an attractive substitute to unsecured personal loans portfolio. The loan-to-value ratio in the case of banks is 55-65 per cent.


A significant portion of a bank's gold loans portfolio is for agricultural purposes such as crop loans, which qualify under priority sector lending. Among the banks that are active in gold loans are Indian Bank, Indian Overseas Bank, State Bank of Travancore, South Indian Bank, Federal Bank and Andhra Bank.


Though a bank charges lower interest (8-12 per cent) on gold loans compared with an NBFC (20-24 per cent) or a pawnbroker (over 30 per cent), lack of adequate focus on the segment, high level of documentation, and delay (can take a couple of days) in loan approval and disbursal (by cheque) are the main drawbacks in taking a gold loan from a bank.


Source: http://www.thehindubusinessline.com/2010/02/17/stories/2010021751361700.htm