City Union Bank, which has significance presence in southern India sees no stress on its gold loan portfolio unlike other gold financers, and hopes to maintain its net interest margin at 3.3 percent going forward, N Kamakodi, MD & CEO, City Union Bank told CNBC-TV18 today.
While other gold lenders like Manappuram Finance and Muthoot Finance are seeing high interest income reversal and are facing delay in repayment of loans, City Union Bank claims to have loan to value (LTV) of 80-85 percent. The company offers agriculture jewel loan at an interest rate of 10.75-12.50 percent and non- agriculture jewel loans at 14.5 percent. "We don't go for this 24 percent or 18 percent so that is why we are very much safe," said Kamakodi. He further stressed that 99 percent of such gold loans get repaid and the account is closed within one to one and half years.
The bank recently further strengthened its presence Southern India by opening nine new branches; four branches in Andhra Pradesh and five in Tamil Nadu.
Below is the verbatim transcript of the interview
Q1: As we have been saying one of gold loan companies had guided for higher delinquencies. They had said that they are likely to see higher interest income reversal. In your gold loan portfolio are you facing any stress?
A: Absolutely not and our loan to value (LTV) is around 80 percent to 85 percentage maximum and we don’t see any stress on that portfolio as of now.
Q: How is your repayment structured? One of the problems that Manappuram, Muthoot kind of companies reported is that they accept their interest as a bullet payment along with the principal at the end of redeeming the loan and hence, that encouraged delinquencies, because interest rates were high probably 16-18 percent. The price of gold falling by 10 percent made more sense for a person to default and buy the same gold from the market – are yours bullet payments? What are your typical interest rates?
A: Let me give you a background of how this business was handled over a period of time. If one looks about three decades back maybe close to about 50 percentage of the portfolio of the old private sector banks was from loan and about thee-four years back it got reduced to as low as 10 percent.
Typically for us, the collection of interest will be like bullet payment along with the principal, but if you look at the repayment pattern, about one third of the loan will be redeemed within three months and about 80 percent of the loans get repaid within one year.
If one looks into time frame of 15 to 18 months, about not less than 99 percent of the loan gets repaid and the account is closed within one, one and half years.
As far as LTV is concerned Reserve Bank of India (RBI) has given 15 percent haircut especially on the calculation of assets, which means that for LTV below 85 percent it is practically zero. If one looks currently the quantum of loan we give per grams about Rs 200,000 that is about 20 percentage of prevailing price of about Rs 2,700 per gram. Our interest rate for example, if one looks into our cash; agriculture makes about 60 to 70 percentages.
Q: What is the interest rate that you charge on a typical gold loan?
A: For agriculture jewel loan the interest rate is between 10.75 and 12.5 percent. For non-agriculture jewel loans it is about 14.5 percent, or 14.75 percent. We don't go for this 24 percent or 18 percent so that is why we are very much safe.
Q: I have a study from a brokerage which says that lot of gold NBFCs have found that customers those who borrowed between August 2011 and January 2012 have not prepaid as they normally do. One third of the loans coming in the first three months has not been a behaviour pattern in the last one year for several NBFCs. You don’t notice any change in bahaviour and short point is your gold loan portfolio asset quality just what it was say two years ago. You notice no change at all, no deterioration at all?
A: Absolutely. The repayment pattern is same, the recovery is the same. For us we had never gone to LTV of 90 percent or 95 percent.
Q: The RBI rules is now 60 percent. There is no question. Even 80 percent is above their rule, they want it to pare down considerably and that has had its own consequences- what is your margin picture looking like? Have you come down to 60 percent, I would assume you have?
A: It will be coming down to.
Q: What is your margin picture likely to look because you reported a decent improvement in margins in the third quarter?
A: If one has consistently watched our performance over a period of about 20-25 quarters we have consistently reported an average margin of about 3.3 and range upto 3.1-3.2 to 3.6-3.7. We hope we should be able to maintain that as we move forward.
Q: I am just asking for the direction of net interest margins – will the fourth quarter be better than third quarter?
A: It will be almost closer to around the same figures we have given.
Q: You had this one asset quality problem, one asset going bad, your gross non performing loans (NPL) rose by 8 percent and net NPLs by 13 percent. This quarter should we expect that number to come down, remain stable?
A: The numbers we expect to be remain stable without any problem and even after whatever 10 percent, 12 percent increase, our gross NPA has consistently remained below 1.25 percent and net NPA between 0.5-0.6.