By CL Jose
If borrowers pay on time, the schemes may end up in loss!
KOCHI/February 23-2022: These are ‘happy hours’ for gold loan borrowers, especially for the down and out, as gold loans are now available even at rates as low as 6.9 per cent.
Has anyone ever wondered how on earth these gold loan companies and some banks manage to give away gold loans at rates manifestly lower than their cost of funds and turn out good returns at the end of the day?
[Meanwhile, banks are disallowed to lend below their marginal cost of funds-based lending rates (MCLR), which roughly range between 7.15 per cent and 8.15 per cent (as of February, 2022)].
Most major gold loan companies have advertised certain gold loan schemes offered at unbelievably low rates. Muthoot Finance offers gold loan at 6.9 per cent; Manappuram lends at 6.9 per cent; you can borrow from ICL at 8.3 per cent; and lately, Federal Bank has also jumped on the bandwagon, offering gold loans at 6.99 per cent.
One will be surprised to learn that the success of many of these schemes squarely rests on the ‘failure’ of the clients to pay up on time.
Cost of funds
Muthoot Finance has, in its latest Investor Presentation, clearly stated that its ‘interest expense on average loan assets’ is 7.93 per cent, and with the funds thus sourced, the company has earned an interest income at 22.17 per cent. Interesting it sounds?
In the case of Manappurram Finance, its cost of funds was 8.4 per cent during the quarter ending December 31, 2021 compared with 9.3 per cent a year ago.
But both companies have advertised loans at 6.9 per cent and have made money too!
Rate war on
The rate war has been raging hot in the market ever since some banks decided to boost their gold loan business, which is relatively safe, remunerative and at the same time doesn’t seek larger capital as gold loan is a far lesser riskier asset class.
The move had got a fillip last year following the RBI decision allowing banks to raise their loan to value (LTV) to 90 per cent compared with the NBFCs’ 75 per cent, meaning that the banks could lend loans to the extent of 90 per cent of the value of gold.
In fact, the RBI move prompted the NBFCs- primarily gold loan companies – to chalk out strategies to take on the competitive edge gained by the banks through the RBI incentive.
Some banks, flush with funds, set out to sell gold loans aggressively, with a few like CSB Bank, discreetly setting targets for employees.
The extremely low rates in gold loans though sound outwardly tempting, in most cases, borrowers end up paying through their nose, but leaving no space to fault the lenders.
Rates grow on their own!
In the case of Muthoot Finance, the largest gold loan company in the country, they don’t hide anything, but the ‘catch’ is in the terms of lending, where some borrowers are bound to skid, at least once.
Their terms state that the interest needs to be settled each month failing which the seemingly benign 6.9 per cent interest rate would become 12 per cent at the first default, and thereafter rise to 16 per cent in the second, and ultimately lands up at 20 per cent plus.
Manappuram Finance too follows the same trajectory for interest rates, but makes a ‘short work’ of the interest rates slabs, straight going up to 20 per cent plus at the first month of default. ICL’s interest rate also soars from the initial 8.3 per cent at the first instance of default to 20 per cent plus per cent.
Manappuram too earned an average yield upwards of 22 per cent on gold loan book during the third quarter. These info have been gathered from the respective branches of these companies.
While Manappuram offers the special low rate for loans of minimum Rs5 lakh and above, at Muthoot, loans of Rs50,000 and above stand to enjoy the low rate previlge. Talking to businessbenchmark.news, CEO of an NBFC said, “Whateever low rates are on offer, the companies will earn an additional three percentage as ‘blended rate’, thanks to the fact that many borrowers will obviously miss the payment date, thus ending up paying penal rates.”
Federal Bank
Federal Bank, the largest bank from the state, has also entered the low interest gold turf, but with a different strategy. On the one hand, only loans of Rs10 lakh and above attract their special low rate of 6.99 per cent, on the other, the tenure of these loans has a ceiling of four months.
The interesting rider to this loan is that the bank charges about 0.65 per cent as processing and appraisal charges, which work out another 1,95 per cent.
To cut a long story short, though the 6.99 per cent rate per se may sound tempting, the processing and appraisal fee togeher take the effective rate close to 9 per cent.
