Banks pursuing ‘golden’ path to shore up bottom line

Most Kerala banks struggle to sustain profitability

KOCHI: A new revelation has dawn on the banks – that why they risk their capital to lend at less lucrative rates and take on larger risks. They seem to have discovered the real solution – the path to profitability lies in gold loan!

Banks that have long been beaten up by the tenacious bad loan malaise are now shedding their false prestige and dusting off the ‘less glamorous’ gold loan business in order to strengthen their bottom line.

It’s a plain fact that the gold loan companies, whose fund base is supported to a good extent by these banks and other financial institutions, roll out improved profitability quarter after quarter.

In the same market space, these ‘sophisticated’ banks struggle to keep their head above water – lately with the Thrissur-based 9-decade old South Indian Bank (SIB) having deplorably failed to ‘stay in black’ for the last quarter of FY20.

An off-hand comparison of the fourth quarter performance of the two leading gold loan companies and the four decades-old banks in the state (Kerala) brings out the real picture.

While the largest gold loan company Muthoot Finance announced Rs815 crore as profit for Q4, Manappuram pulled off Rs398.2 crore. Coming to the banks, the largest bank – Federal Bank, as usual, has ended the quarter with a decent profit of Rs301.2 crore, still a far cry from the less glamorous gold loan companies, whereas the other three banks – SIB as discussed before, closed the quarter with a loss of Rs143.9 crore, while CSB Bank and Dhanlaxmi finished the quarter with miniscule profits of Rs12.72 crore and Rs2.6 crore respectively.

Many in the industry seem to be nursing second thought on their business model. In gold loan, while the capital charge is practically zilch, the chances of recovery of the loan are almost 100 per cent in the present circumstances.

“The risk weight (in gold loan) though is applicable as for consumer credit, which is 100 per cent, since it is applied on net exposure – ie, outstanding minus collateral value, the risk weighted asset value in the case of gold loan will be zero in most cases,” explained a top official of a Thrissur-based bank.

This simply means the banks need not have to bother too much about capital even when the gold loan portfolio grows. Moreover, the returns are much higher in goldl loans compared with other loans.

“Even if you don’t charge like the gold loan companies that demand prices as high as 24 per cent and above in some cases, even rates at 12 to 15 per cent could fetch good returns for the banks,” said financial controller of another bank.

The bank that first ventured into taking a detour from the conventional lending meaningfully was CSB Bank, where Fairfax Financial Holdings invested Rs1200 crore last year to pick up a majority stake. The bank has successfully built a gold loan portfolio of 31 per cent (of total loan book). The MD and chief executive of the bank, CVR Rajendran has recently reiterated that his bank would take the gold loan portfolio up to 40 per cent in the near future itself.

CSB Bank, the only bank (share) from Kerala that trades above its book value has already launched an innovative gold loan product ‘Akshaya Gold Loan that can be used like an overdraft, by virtue of which the customer needs to pay interest only for the amount drawn.

SIB’s gold loan portfolio has increased by a fourth during the past year alone, from Rs2216 crore to Rs2,757 crore. Moreover, agricultural loans at Rs9873 crore and MSME loans valued at Rs15,819 crore also include loans disbursed with the backing of gold collateral.

Federal Bank also views gold loan seriously. Shyam Srinivasan, the MD and chief executive of Federal Bank recently stated that on the business front, the bank has achieved robust growth in the retail segment with housing loans and gold loans growing handsomely.

While the retail advances grew by 19.39 per cent to reach Rs37,877.97 crore as on  March 31, 2020, gold loans registered a robust growth of 28.68 per cent to reach Rs9,301 crore.

For Federal Bank, gold loans currently account for one-fourth of its retail loan portfolio. “Your bank focuses on providing gold loans to borrowers as an easy source of finance to the needy with quick turnaround time,” Srinivasan told the bank’s shareholders.

Federal Bank has schemes such as Agricultural Gold loans, Business gold loans, Overdraft loans, EMI Gold loans and bullet repayment loans. It has also launched digitally powered doorstep gold loan services in association with a FinTech company, to enhance the ease of availing gold loans.

Several public sector banks such as SBI and Canara Bank have already been active in the state’s gold loan market for some time now.



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