KOCHI: A lot of fine-tuning has been taking place in the banking space not only to control the interest rates, but more so to bring in transparency on how they arrive at their rates.
Thus as everyone knows, pricing went through the prime lending rates (PLR) regime, to base rate, and the latest MCLR system. RBI has now come to a stage whereby it has served the banks the ultimatum to switch to external benchmark-linked pricing at least for certain segments of loans to start with. This move is expected to bring in a lot more transparency into the system.
Is there any basis on which the gold loan companies calculate their pricing? The interest rates are left to the hands of ‘competition’ which has miserably failed to have any influence on such rates.
Quite obviously, the customers, the most deprived, wouldn’t bother to bargain or lobby for a legitimate rate for their borrowings from these companies.
And interestingly, banks though have a much better rate to offer on gold loans, don’t want to waste their time on such trivial deals and rather prefer in turn to extend wholesale funding to these gold loan companies and strengthen their fund base.
The gold loan companies are literally given a long leash in pricing (interest charged) of their loans compared with their banking counterparts, or even the local firms operating under the Money Lenders Act of Kerala.
And this could be one of the reasons why while the interest margins for banks are shrinking gold companies manage to widen it almost consistently.
It’s a known fact that the RBI keeps pressuring banks to pass on each policy rate cut, as low as even 25 basis points, (quarter of a percentage point), and the banks have historically tried to follow the RBI directives, albeit with a time lag.
On a different note, the Kerala’s State government a few days ago fixed 18 per cent as the maximum rate of interest that could be charged by moneylenders in the state.
“The government had set the benchmark for interest for private loans to insulate the public from the trespasses of loan sharks who charged exorbitant interest from borrowers,” the Finance Minister, Dr TM Thomas Isaac had said while explaining the government move.
The Kerala Money Lenders Act, 1958, limits the moneylenders to charge interest on any loan at a rate not exceeding 2 per cent above the maximum rate of interest charged by commercial banks on credit of the same business nature.
Notwithstanding the pricing compulsions under which the banks and other financial institutions function, the gold loan companies here seem to be impervious to any such theories and hence choose to carry on with their lending business with margins as high as they please to charge.
Neither RBI nor the state government has been yet heard of instructing or advisibg the gold loan companies to bring down their interest rates despite the fact that the customers are invariably from the marginalised class.
Needless to say, these companies are able to generate pretty wide interest margins helping them achieve stronger bottom line with high return ratios compared with their counterparts in the industry.
An analysis of the financials of the gold loan companies in Kerala throws open interesting facts as regards their earnings and the related ratios that are a far cry from the banks.
While the banks are struggling to maintain a net interest margin (NIM) of around 2.5 per cent or even less, Muthoot Finance, the largest gold loan company has generated an NIM of 14.47 per cent for the financial year ending March 31, 2019 – growing by more than 44 per cent during the last three years.
Manappuram Finance, another leading gold loan company, also has generated a similar NIM through their operations. While Muthoot Finance boasts an average yield of 21.63 per cent on its loan assets, Manappuram’s average yield on vehicle and equipment finance is close to 20 per cent (that of gold is not available).
The interesting part of this narrative is that a big portion of these companies’ funding is provided by banks at cost as low as around 9 per cent, giving the gold loan companies headroom to churn out good margins from outside funding too.
About half of the stable source of funds of Muthoot Finance, at Rs28,148.5 crore, is provided by banks, which also incidentally maintain a gold loan portfolio though relatively small. Historically, gold loan borrowers normally avoid approaching banks for their fund requirements, thanks to the cumbersome formalities followed by these banks, and this has helped the gold loan companies amass huge business.
Manappuram Finance also depends on banks and other financial institutions (FIs) for its stable source of funds, but in a bigger scale. The company’s latest financials show that about 65 per cent of its stable source of funds is sourced from the banks and FIs in the form of working capital demand loans (WCDL) and term loans, the rest coming from NCDs, commercial paper (CPs) etc.
The operations model followed by the gold loan companies in Kerala helps them achieve descent return on equity (RoE) and return on assets (RoA) that no banks can even dream of in the foreseeable future.
The high returns generated by the gold loan companies should be viewed in the context of their business of lending against gold, an asset class that is much more secured than most assets banks deal with normally.
While banks on an average generate a return on assets (RoA) of around 1 per cent or even less during these tougher times, an RoA of 5 or 6 is just normal for a gold loan company.
Likewise, against a return on equity (RoE) in the region of 10 per cent generated by well-run banks, an RoE of 20 per cent is not a big deal for the gold loan companies. In the case of Federal Bank, the largest and the most profitable bank in Kerala, the latest RoE was 9.63 per cent whereas that of South Indian Bank (SIB) was much less at about 5 per cent.