15-20% price change unlikely to hurt biz: Gold Loan body

Moneycontrol Bureau

The sharp fall in gold prices prompted investors to shun their investments in the gold loan companies like Muthoot and Manappuram. However, the Association of Gold Loan Companies (AGLOC) is of the opinion that a 15-20% price fluctuation is unlikely to dent their business.

"A 15-20% price fluctuation in gold prices will not have any significant impact on the gold loan portfolios of member companies as they have already factored such fluctuations in the business model. Though gold price is an important factor in gold loan business, the business model should not be misunderstood as a business of financing of gold bullion or shares," AGLOC said on Monday.

Since last 15 days, Muthoot and Manappuram shares have tanked 28 percent and 22 percent respectively. The drops are sharper to the tune of 38% and 51 percent in the last one month.  ICRA – the domestic arm of global rating agency Moody's, has downgraded the outlook on the long term ratings of these companies from stable to negative.

According to George Alexander Muthoot, President – AGLOC, who is also the MD of Muthoot Finance, gold loan companies are majorly lending against household jewellery where the impact of such temporary fluctuations on the business model is minimum.

"These loans are of short duration of 3-6 months. Compared to the disbursements, NPA levels are low," he said.

Gold prices in India, the world's largest buyer of the yellow metal, dropped 21 percent from the record high of Rs 32,464 for every 10 grams in November. The steep fall led investors to press the panic button. On MCX, the gold future was trading at around Rs 26,300 per 10 gram in afternoon trade on Monday.

A feedback study done by AGLOC among its members reveals that most of the companies have majority of their branches in semi-urban and rural areas and the majority of their loan book consists of loans with an average ticket size below Rs 1 lakh.

Hence, probabilities of defaults are low despite fall in gold price. The gold loans companies have a system of regularly calling up their borrowers and reminding them about their dues. The companies extend a monthly interest collection target every month to all its branches which ensures in maintaining regular interface with customers and promotes prompt repayment habit among the borrowers, AGLOC claimed.

"AGLOC has asked member companies to review its existing collection mechanism and further strengthen it. There should be regular monitoring of overdue and high loan to value loan accounts. Companies should auction defaulted and abandoned loan accounts with due compliance to fair practice code stipulated by RBI," said Muthoot adding that AGLOC has already reduced the maximum lending rate in the light of fall in gold price. However, he did not mention any rate of reduction.

AGLOC, a self regulatory body registered with the RBI, observed that demand for gold loans among its members continued to be robust.

saikat.das@network18online.com