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Lure Of The Yellow Metal

Photo Credit :

The journey from Kochi to Valapad, a small hamlet near Thrissur in Kerala, is a gruelling 85-km drive. The serpentine roads of Valapad lead to Manappuram Finance, India's fastest-growing private gold loan company. Nestled among many small, old-fashioned crammed buildings, Manappuram's headquarters is housed in a similar unassuming building that looks like a typical government office. Stairs and several narrow corridors lead to the office of V.P. Nandakumar, executive chairman of Manappuram Group of companies, who was also the largest wealth creator in Kerala last year.

Like its golden beaches, Valapad is also proud of Manappuram. "Manappuram and Gulf jobs brought life and prosperity to numerous people here," says the driver Viswabharan, who hails from the nearby village of Thriprayar, famous for its Sri Rama temple.

The 57-year-old, soft-spoken Nandakumar and the unimpressive headquarters camouflage the aggressive growth of the second-largest gold finance company. Manappuram's average asset under management or AUM (read gold loan business) rose nearly 11.5 times in three-and-a-half years and the number branches rose five times to about 2,500. The market values the company at Rs 4,500 crore now.

But Manappuram's feat doesn't take it near the juggernaut, Muthoot Finance (M-Fin), which has nearly 3,200 branches across India and an AUM of Rs 20,000 crore. M-Fin's branches grew 4.5 times, AUM rose nine times in three and half years, and the market value is Rs 6,500 crore.











"The sale of ornaments in jewellery shops in the coastal belt rises during Chakara, which is a good time for fishermen," says George Alexander Muthoot, managing director, Muthoot Finance (BW Pic By Rajesh Natarajan)

M-Fin can be credited with setting standards for the gold loan industry. It was also instrumental in taking the business to North India from its traditional bastions in the South.

In 1979, when the gold price was around Rs 10 per gram, they had opened branches in Delhi, Faridabad and Chandigarh. "We were giving loans of Rs 10 at that time and had 100 employees. Now we are giving loans from Rs 5,000 to Rs 1 crore and the headcount is 20,000," says George Alexander Muthoot, managing director of M-Fin.

A map of India hanging on the wall of the managing director's office in Kochi shows how keen M-Fin is to spread its geographical presence. Apart from opening branches, Alexander says, increasing the gold loan business in each branch will be the priority. At present, M-Fin's average gold loan business from a branch is Rs 6 crore.

The third-largest player, Muthoot Fincorp, is present in all the states except Madhya Pradesh and Bihar. Thomas John Muthoot, chairman and managing director of Fincorp, says, "We have to enter big states with good number of branches to achieve operational efficiency." Fincorp is also planning 2,500 branches by March 2012 from the present 2,000, and a public offering of shares by 2013.

Piggy Riding On Gold











Click here to view enlarged image

It is also chakara time for the gold loan companies. Chakara is a seasonal marine phenomenon in which a large number of fish and prawns throng together in the mud bank formations after the monsoon. Fishermen consider it as a godsend as they can catch many at a single attempt.

"Sale of gold ornaments in jewellery shops at the coastal belt rises during chakara. Women use the additional income to buy small quantities of gold, as insurance for the bad times ahead," says Alexander of M-Fin. About 70 per cent of this gold is pledged for loan during the bad times, says K. Sivan, who runs a small jewellery shop in Thiruvananthapuram.

Like fishermen, most of the customers of gold loan companies are from small-income groups. Take Manappuram, for example. Out of its 1.36 million customers, only 1 per cent took loans worth more than Rs 5 lakh. Those who borrowed less than Rs 25,000 constitute as much as 45 per cent.

One will wonder what drives the sudden spurt of this industry, which shows a compounded annual growth rate (CAGR) of over 35 per cent in the past three years, and is now spread across almost all states with aggregate AUM size of over Rs 50,000 crore.

break-page-break
"With gold prices appreciating steadily over the past few years, customers now have an opportunity to unlock investments in gold without selling the asset. Further, the entry of more players created awareness about using gold as a means of credit," says Biju Pillai, executive vice-president and business head at HDFC Bank.

Between 1 January 2008 and 13 September 2011, gold prices went up 159 per cent to Rs 2,786.08 for a gram of 24 carat gold. Sensing this opportunity, state-run and private sector banks had also started offering gold loans, but could not match the scale of specialised players.

According to an executive with a global bank, there are three types of gold financiers: banks (which lends 60-65 per cent of the gold's face value), non-banking financial companies  or NBFCs (70-75 per cent) and pawn brokers in the unorganised sector (100 per cent).

"Indian households have 18,000 to 20,000 tonne of gold (nearly 60 per cent of India's gross domestic product). Of this, less than 500 tonne is with the gold finance companies and there is huge potential for this business," says Alex K. Mathew, head of research at Geojit BNP Paribas.

India, the largest consumer of gold in the world, imported 553 tonne in the first half of 2011, up by 34.9 per cent, according to the World Gold Council (WGC). Imports jumped 72 per cent in 2010 to 959 tonne. South India accounts for 40 per cent of gold demand and about 90 per cent of the gold loan market.

The Sudden Spurt
The gold financing companies grabbed the lurking opportunity during the financial crisis after the fall of Lehman Brothers. Indian banks, which could not find borrowers for secured loans during the time, funded heavily for the nation-wide expansion of the gold financiers. RBI has also signalled liberal lending by gold loan financiers. The result is up to five times growth in the number of branches.

The demand also went up in parallel for gold loan products. As the unsecured loan market dried up after global financial firms reduced exposure in the space, customers who wanted small loans of Rs 20,000-50,000, flocked to the counter of gold loan companies. The result is six to nine times rise in AUMs. Interestingly, the scare of financial downturn is looming large again and that may help gold loan companies.

The gold loan companies got a major boost when in 1997 the RBI allowed to raise money against loan book (immovable properties). Now, they mostly borrow at normal interest rates (7 per cent currently) from banks against AUMs as collateral. They also raise funds through instruments like debentures, commercial papers and mutual funds. Then they lend against gold at a rate varying from 12 per cent to 35 per cent.

Take the case of M-Fin. Out of its Rs 16,860 crore liabilities as of 30 June 2011, borrowings from banks constitute Rs 7,288.5 crore. Manappuram had credit lines worth Rs 8,135 crore as of 30 June 2011, and of this, 56 per cent (Rs 4,584 crore) are borrowings from banks.

The two listed firms — M-Fin and Manappuram — are again in the market now for raising Rs 1,000 crore and Rs 750 crore, respectively, by issuing non-convertible debentures (NCDs) to fund the expansion plan.

M-Fin had registered a growth of  117 per cent in profit to Rs 494 crore in 2010-11, on a revenue of Rs 2,316 crore, which rose by 112 per cent. Manappuram Finance posted a 136 per cent rise in profit at Rs 282.66 crore and a 147 per cent jump in revenue at Rs 1,178.75 crore during the same period.

The Golden History
Cash against gold is not a new business. Since time immemorial, the precious yellow metal was an important standard of value for wealth, and it was always a target for most of the invading armies.

B.L. Gupta's book Value And Distribution System In Ancient India mentions grain, cow and metals such as gold were the standards for barter in Vedic India. ‘Niska' (similar to a necklace) was used as a sort of currency, a standard of value or measure.

If express cash against gold is not a new business in India, the credit of transforming it into an organised business goes to the Muthoots. The Muthoot family, an orthodox Christian family based in Kozhencherry, a small town about 70 km from Kochi, had gold loan business since 1939. Ninan Mathai Muthoot started off as a small-time trader in 1887. Over the years, his sons — Mathai Ninan, Mathai George, Mathai Mathew and Mathew M. Thomas (Pappachan) — took over the reins and re-established the business. The family splintered into four separate business houses in 1979.











"Manappuram has no intention to shift the head quarters from my home village (Valapad in Thrissur)," says V.P. Nandakumar, Executive chairman, Manappuram Group of companies (BW Pic By Rajesh Natarajan)

Now, the flagship firms of the four post-split Muthoot families — M-Fin, Muthoot Fincorp, Mini Muthoottu and Muthoot Mercantile — have gold loan as their main business. All have diversified into other areas such as education, IT, entertainment, plantations and hospitality.

"We had lots of forest contracts and entered into financial services in 1939, with M. George and Brothers Bank. We started lending against gold, along with commercial loans, and people from different parts of the country used to come to Kozhencherry to get loans," says M-Fin's Alexander.

The Rs 2,000-crore Muthoot Mercantile has about 40 branches in Kerala and plans to open two to three branches every month. Mini Muthoottu has close to 450 branches in Kerala, Karnataka and Tamil Nadu. Then there are other popular gold loan companies like the 82-year-old  Kottayam-based Kosamattam Finance with over 450 branches and the Pathanamthitta-based Popular Group.

Among them, Manappuram was never a prominent player in the past. Nandakumar was an officer with Nedungadi Bank (which later merged with the Punjab National Bank) till 1986, when his father V.C. Padmanabhan, who was a money lender running a pawn shop in Valapad, passed away. He quit his job and joined the business. It was 12 years later, in 1998, that he shifted the focus to gold loan business.

Nandakumar says he wanted to do the business differently. Manappuram approached the capital markets with its first public issue of shares in 1995, second from Kerala immediately after the listing of Federal Bank. His rival and pioneer M-Fin issued shares to the public only in March 2010 and raised Rs 901 crore. The issue was oversubscribed 22 times.

Not Without Risk
Mohan Kumar, a professional in Kerala, got a marketing call six months ago asking for gold loan requirement. Since there was no gold with him, the manager of the newly opened branch credited Rs 6 lakh initially in his account without any collateral. Mohan bought gold coins worth the amount and pledged it to the financier. In the first week of September, he closed the loan by paying Rs 6.35 lakh. As the pledged gold was worth Rs 9 lakh, he made a neat profit of Rs 2.65 lakh.

break-page-break
Sure, if gold prices crashed drastically, this loan would have been a non-performing asset. Always giving 100 per cent loan to the worth of gold is risky. But Nandakumar says gold prices have never crashed beyond 5 per cent. "Even if the prices rise, we won't benefit because of the security, since it is para banking. We are not owners of gold, but only custodians of security," he says.

Alexander says that M-Fin gives loans only against gold ornaments, which have an emotional value. Customers tend to take it back once they get the money. "We lend up to 72 per cent of the value of the gold. Moreover, we don't lend against the making charge of the ornament, which is around 15 per cent," he says.

Almost all other players follow a similar strategy to de-risk their business. "If a jeweller brings a tonne of gold for pledge, we will not lend to him. But if a family brings a few sovereigns, we are happy to lend; we know they will surely come back to take it," says Nandakumar.

The major gold loan companies charge interest based on the value of gold. If the borrower needs less money against the value of gold, the interest will be lesser. "Since gold loan is a secured credit, customers enjoy the benefit of much lower interest rates and faster loan processing compared to other forms of credit," says Biju Pillai of HDFC Bank.

According to Alex Mathew of Geojit BNP Paribas, people prefer pawning gold to taking a loan. "Bank interest rates are going up. Availing a loan is more difficult, involves delays and paperwork," he says. In fact, it is this "quick service" that has made gold loan popular. Thomas John of Muthoot Fincorp says gold loan is like an ATM facility. "You don't draw money because you have an ATM card and an ATM nearby. You draw the money only if you need. Similarly, gold loan is also requirement based."

The other challenges traditionally faced by the gold financiers include pledging of gold plated ornaments, lower purity gold, theft and robbery at the branches. The organised players claim to have concrete strong rooms with safety precautions. They have insured the security as cover against theft. The quality of the gold is checked by trained appraisers. Players such as M-Fin runs training schools to counter these issues. The precautions include strict observance of KYC (know your customer) norms and reference, points out Thomas John.

The Gold Plating Strategy











"We have to enter big states with a good number of branches to achieve operational efficiency," says Thomas John Muthoot Chairman and managing director, Muthoot Fincorp (BW Pic By Nizar Naveen)

In the country's privately held gold, only 10 per cent is in the loan market. Of the 10 per cent, only around 25 per cent is in the hands of organised players. The rest is with the pawn shops and money lenders, says ICRA Management Consulting's Gold Market Report 2010.

The companies are today competing in giving loans as quickly as possible. While M-Fin and Manappuram offer loans in five minutes, Fincorp and Muthoot Mercantile attracts customers with two- and three-minute offers.

Gold financiers cater to the rural, semi-urban and urban markets. In the rural area, the gold loan is taken mostly for agriculture and household purposes. Agriculture, household and trading requirements leads to loans in semi-urban geographies. In urban and metro areas, it is more of margin money for buying house, household-hospital-education expense and small-time trading requirements.

In Delhi and Mumbai, there is demand for gold loan under equated monthly instalment (EMI) scheme. Muthoot Fincorp has a loan product that offers payment through EMIs.











Click here to view enlarged image

The next natural step for the gold loan companies is a banking licence. It would be a boon for them as the companies could reduce the cost of funds by accepting deposits. As the interest for these deposits is low, the financiers could utilise this fund for lending to gold loan customers at higher interest rates.

But with the industry expanding, and companies luring customers with heavy advertising, regulatory interventions are in order. Reports say RBI is already probing the books of some companies to assess the implication of concentration of risk that could make the non-banking sector shaky in the event of a sharp fall in gold prices, as has happened with silver recently. The central bank is worried that any sharp correction in gold prices would adversely impact the operation of these companies as the value of the underlying asset would decline.

For now, the prospects look bright for these gold financing companies. However, they may face more stringent regulatory environment in future, and this could dent their business. Another threat is entry of more organised players with better resources. Last year, for example, Mahindra Finance launched its gold loan products in Kerala.

The lucrative nature of the gold loan market attracts many bees. The three musketeers will have to sweat a lot to stay in top order.

nevin(dot)john(at)abp(dot)in

(This story was published in Businessworld Issue Dated 03-10-2011)


The journey from Kochi to Valapad, a small hamlet near Thrissur in Kerala, is a gruelling 85-km drive. The serpentine roads of Valapad lead to Manappuram Finance, India's fastest-growing private gold loan company. Nestled among many small, old-fashioned crammed buildings, Manappuram's headquarters is housed in a similar unassuming building that looks like a typical government office. Stairs and several narrow corridors lead to the office of V.P. Nandakumar, executive chairman of Manappuram Group of companies, who was also the largest wealth creator in Kerala last year.

Like its golden beaches, Valapad is also proud of Manappuram. "Manappuram and Gulf jobs brought life and prosperity to numerous people here," says the driver Viswabharan, who hails from the nearby village of Thriprayar, famous for its Sri Rama temple.

The 57-year-old, soft-spoken Nandakumar and the unimpressive headquarters camouflage the aggressive growth of the second-largest gold finance company. Manappuram's average asset under management or AUM (read gold loan business) rose nearly 11.5 times in three-and-a-half years and the number branches rose five times to about 2,500. The market values the company at Rs 4,500 crore now.

But Manappuram's feat doesn't take it near the juggernaut, Muthoot Finance (M-Fin), which has nearly 3,200 branches across India and an AUM of Rs 20,000 crore. M-Fin's branches grew 4.5 times, AUM rose nine times in three and half years, and the market value is Rs 6,500 crore.

M-Fin can be credited with setting standards for the gold loan industry. It was also instrumental in taking the business to North India from its traditional bastions in the South.

In 1979, when the gold price was around Rs 10 per gram, they had opened branches in Delhi, Faridabad and Chandigarh. "We were giving loans of Rs 10 at that time and had 100 employees. Now we are giving loans from Rs 5,000 to Rs 1 crore and the headcount is 20,000," says George Alexander Muthoot, managing director of M-Fin.

A map of India hanging on the wall of the managing director's office in Kochi shows how keen M-Fin is to spread its geographical presence. Apart from opening branches, Alexander says, increasing the gold loan business in each branch will be the priority. At present, M-Fin's average gold loan business from a branch is Rs 6 crore.

The third-largest player, Muthoot Fincorp, is present in all the states except Madhya Pradesh and Bihar. Thomas John Muthoot, chairman and managing director of Fincorp, says, "We have to enter big states with good number of branches to achieve operational efficiency." Fincorp is also planning 2,500 branches by March 2012 from the present 2,000, and a public offering of shares by 2013.

Piggy Riding On Gold
It is also chakara time for the gold loan companies. Chakara is a seasonal marine phenomenon in which a large number of fish and prawns throng together in the mud bank formations after the monsoon. Fishermen consider it as a godsend as they can catch many at a single attempt.

"Sale of gold ornaments in jewellery shops at the coastal belt rises during chakara. Women use the additional income to buy small quantities of gold, as insurance for the bad times ahead," says Alexander of M-Fin. About 70 per cent of this gold is pledged for loan during the bad times, says K. Sivan, who runs a small jewellery shop in Thiruvananthapuram.

Like fishermen, most of the customers of gold loan companies are from small-income groups. Take Manappuram, for example. Out of its 1.36 million customers, only 1 per cent took loans worth more than Rs 5 lakh. Those who borrowed less than Rs 25,000 constitute as much as 45 per cent.

One will wonder what drives the sudden spurt of this industry, which shows a compounded annual growth rate (CAGR) of over 35 per cent in the past three years, and is now spread across almost all states with aggregate AUM size of over Rs 50,000 crore.

"With gold prices appreciating steadily over the past few years, customers now have an opportunity to unlock investments in gold without selling the asset. Further, the entry of more players created awareness about using gold as a means of credit," says Biju Pillai, executive vice-president and business head at HDFC Bank.

Between 1 January 2008 and 13 September 2011, gold prices went up 159 per cent to Rs 2,786.08 for a gram of 24 carat gold. Sensing this opportunity, state-run and private sector banks had also started offering gold loans, but could not match the scale of specialised players.

According to an executive with a global bank, there are three types of gold financiers: banks (which lends 60-65 per cent of the gold's face value), non-banking financial companies  or NBFCs (70-75 per cent) and pawn brokers in the unorganised sector (100 per cent).

"Indian households have 18,000 to 20,000 tonne of gold (nearly 60 per cent of India's gross domestic product). Of this, less than 500 tonne is with the gold finance companies and there is huge potential for this business," says Alex K. Mathew, head of research at Geojit BNP Paribas.

India, the largest consumer of gold in the world, imported 553 tonne in the first half of 2011, up by 34.9 per cent, according to the World Gold Council (WGC). Imports jumped 72 per cent in 2010 to 959 tonne. South India accounts for 40 per cent of gold demand and about 90 per cent of the gold loan market.

The Sudden Spurt
The gold financing companies grabbed the lurking opportunity during the financial crisis after the fall of Lehman Brothers. Indian banks, which could not find borrowers for secured loans during the time, funded heavily for the nation-wide expansion of the gold financiers. RBI has also signalled liberal lending by gold loan financiers. The result is up to five times growth in the number of branches.

The demand also went up in parallel for gold loan products. As the unsecured loan market dried up after global financial firms reduced exposure in the space, customers who wanted small loans of Rs 20,000-50,000, flocked to the counter of gold loan companies. The result is six to nine times rise in AUMs. Interestingly, the scare of financial downturn is looming large again and that may help gold loan companies.

The gold loan companies got a major boost when in 1997 the RBI allowed to raise money against loan book (immovable properties). Now, they mostly borrow at normal interest rates (7 per cent currently) from banks against AUMs as collateral. They also raise funds through instruments like debentures, commercial papers and mutual funds. Then they lend against gold at a rate varying from 12 per cent to 35 per cent.

Take the case of M-Fin. Out of its Rs 16,860 crore liabilities as of 30 June 2011, borrowings from banks constitute Rs 7,288.5 crore. Manappuram had credit lines worth Rs 8,135 crore as of 30 June 2011, and of this, 56 per cent
(Rs 4,584 crore) are borrowings from banks.

The two listed firms — M-Fin and Manappuram — are again in the market now for raising Rs 1,000 crore and Rs 750 crore, respectively, by issuing non-convertible debentures (NCDs) to fund the expansion plan.

M-Fin had registered a growth of  117 per cent in profit to Rs 494 crore in 2010-11, on a revenue of Rs 2,316 crore, which rose by 112 per cent. Manappuram Finance posted a 136 per cent rise in profit at Rs 282.66 crore and a
147 per cent jump in revenue at Rs 1,178.75 crore during the same period.

The Golden History
Cash against gold is not a new business. Since time immemorial, the precious yellow metal was an important standard of value for wealth, and it was always a target for most of the invading armies.
 
B.L. Gupta's book Value And Distribution System In Ancient India mentions grain, cow and metals such as gold were the standards for barter in Vedic India. ‘Niska' (similar to a necklace) was used as a sort of currency, a standard of value or measure.

If express cash against gold is not a new business in India, the credit of transforming it into an organised business goes to the Muthoots. The Muthoot family, an orthodox Christian family based in Kozhencherry, a small town about 70 km from Kochi, had gold loan business since 1939. Ninan Mathai Muthoot started off as a small-time trader in 1887. Over the years, his sons — Mathai Ninan, Mathai George, Mathai Mathew and Mathew M. Thomas (Pappachan) — took over the reins and re-established the business. The family splintered into four separate business houses in 1979.

Now, the flagship firms of the four post-split Muthoot families — M-Fin, Muthoot Fincorp, Mini Muthoottu and Muthoot Mercantile — have gold loan as their main business. All have diversified into other areas such as education, IT, entertainment, plantations and hospitality.

"We had lots of forest contracts and entered into financial services in 1939, with M. George and Brothers Bank. We started lending against gold, along with commercial loans, and people from different parts of the country used to
come to Kozhencherry to get loans," says M-Fin's Alexander.

The Rs 2,000-crore Muthoot Mercantile has about 40 branches in Kerala and plans to open two to three branches every month. Mini Muthoottu has close to 450 branches in Kerala, Karnataka and Tamil Nadu. Then there are other popular gold loan companies like the 82-year-old Kottayam-based Kosamattam Finance with over 450 branches and the Pathanamthitta-based Popular Group.

Among them, Manappuram was never a prominent player in the past. Nandakumar was an officer with Nedungadi Bank (which later merged with the Punjab National Bank) till 1986, when his father V.C. Padmanabhan, who was a money lender running a pawn shop in Valapad, passed away. He quit his job and joined the business. It was 12 years later, in 1998, that he shifted the focus to gold loan business.

Nandakumar says he wanted to do the business differently. Manappuram approached the capital markets with its first public issue of shares in 1995, second from Kerala immediately after the listing of Federal Bank. His rival and pioneer M-Fin issued shares to the public only in March 2010 and raised Rs 901 crore. The issue was oversubscribed 22 times.

Not Without Risk
Mohan Kumar, a professional in Kerala, got a marketing call six months ago asking for gold loan requirement. Since there was no gold with him, the manager of the newly opened branch credited Rs 6 lakh initially in his account without any collateral. Mohan bought gold coins worth the amount and pledged it to the financier. In the first week of September, he closed the loan by paying Rs 6.35 lakh. As the pledged gold was worth Rs 9 lakh, he made a neat profit of Rs 2.65 lakh.

Sure, if gold prices crashed drastically, this loan would have been a non-performing asset. Always giving 100 per cent loan to the worth of gold is risky. But Nandakumar says gold prices have never crashed beyond 5 per cent. "Even if the prices rise, we won't benefit because of the security, since it is para banking. We are not owners of gold, but only custodians of security," he says.

Alexander says that M-Fin gives loans only against gold ornaments, which have an emotional value. Customers tend to take it back once they get the money. "We lend up to 72 per cent of the value of the gold. Moreover, we don't lend against the making charge of the ornament, which is around 15 per cent," he says.

Almost all other players follow a similar strategy to de-risk their business. "If a jeweller brings a tonne of gold for pledge, we will not lend to him. But if a family brings a few sovereigns, we are happy to lend; we know they will surely come back to take it," says Nandakumar.

The major gold loan companies charge interest based on the value of gold. If the borrower needs less money against the value of gold, the interest will be lesser. "Since gold loan is a secured credit, customers enjoy the benefit of much lower interest rates and faster loan processing compared to other forms of credit," says Biju Pillai of HDFC Bank.

According to Alex Mathew of Geojit BNP Paribas, people prefer pawning gold to taking a loan. "Bank interest rates are going up. Availing a loan is more difficult, involves delays and paperwork," he says. In fact, it is this "quick service" that has made gold loan popular. Thomas John of Muthoot Fincorp says gold loan is like an ATM facility. "You don't draw money because you have an ATM card and an ATM nearby. You draw the money only if you need. Similarly, gold loan is also requirement based."

The other challenges traditionally faced by the gold financiers include pledging of gold plated ornaments, lower purity gold, theft and robbery at the branches. The organised players claim to have concrete strong rooms with safety precautions. They have insured the security as cover against theft. The quality of the gold is checked by trained appraisers. Players such as M-Fin runs training schools to counter these issues. The precautions include strict observance of KYC (know your customer) norms and reference, points out Thomas John.

The Gold Plating Strategy
In the country's privately held gold, only 10 per cent is in the loan market. Of the 10 per cent, only around 25 per cent is in the hands of organised players. The rest is with the pawn shops and money lenders, says ICRA Management Consulting's Gold Market Report 2010.

The companies are today competing in giving loans as quickly as possible. While M-Fin and Manappuram offer loans in five minutes, Fincorp and Muthoot Mercantile attracts customers with two- and three-minute offers.

Gold financiers cater to the rural, semi-urban and urban markets. In the rural area, the gold loan is taken mostly for agriculture and household purposes. Agriculture, household and trading requirements leads to loans in semi-urban geographies. In urban and metro areas, it is more of margin money for buying house, household-hospital-education expense and small-time trading requirements.

In Delhi and Mumbai, there is demand for gold loan under equated monthly instalment (EMI) scheme. Muthoot Fincorp has a loan product that offers payment through EMIs.

The next natural step for the gold loan companies is a banking licence. It would be a boon for them as the companies could reduce the cost of funds by accepting deposits. As the interest for these deposits is low, the financiers could utilise this fund for lending to gold loan customers at higher interest rates.

But with the industry expanding, and companies luring customers with heavy advertising, regulatory interventions are in order. Reports say RBI is already probing the books of some companies to assess the implication of concentration of risk that could make the non-banking sector shaky in the event of a sharp fall in gold prices, as has happened with silver recently. The central bank is worried that any sharp correction in gold prices would adversely impact the operation of these companies as the value of the underlying asset would decline.

For now, the prospects look bright for these gold financing companies. However, they may face more stringent regulatory environment in future, and this could dent their business. Another threat is entry of more organised players with better resources. Last year, for example, Mahindra Finance launched its gold loan products in Kerala.

The lucrative nature of the gold loan market attracts many bees. The three musketeers will have to sweat a lot to stay in top order.

nevin(dot)john(at)abp(dot)in

(This story was published in Businessworld Issue Dated 03-10-2011)