Mushrooming gold loan business now under RBI scanner

When asked about the mushrooming gold loan companies and the impact on the financial system if gold prices crash in the future,Subbarao said,“Especially all the assets backed by gold is collateral and mobilisation of money is on that basis,there will certainly be a problem. Our people have told me they are examining it.”

What has attracted the attention of financial players is the steep rise in revenue and profits of some old players who were riding piggyback on the sharp rise in gold prices.

“Every Tom,Dick and Harry now wants to set up a gold loan business. There’s no problem about banks which are entering into gold loan business as they are already tightly monitored by the Reserve Bank of India . The new entrants function as non-banking financial companies (NBFCs). One issue is the source of money for such NBFCs to extend loans with gold as collateral. There could be asset-liability mismatches in the case of borrowed money,” said a banking source.

Most of these gold loan companies charge an interest rate of 24 per cent from their customers. As gold prices have zoomed by 35 per cent to over Rs 27,000 per 10 grams over the last one year,customers are flocking to gold loan companies — which now offer loans in “3 minutes”.

On the other hand,borrowers have to wait for months to get a loan from commercial banks even after submitting numerous documents. Seeing the change in the business pattern,the central bank had recently removed gold loan business from the priority sector lending list.

Apart from the robustness of their business models,a major worry is what will happen to the gold if prices crash suddenly. As the source of funds for gold loan companies is mostly bank borrowings,debenture issues and private equity funds,there’s also the possibility of systemic risk involved.

Outsmarting the performance of many public sector banks,a leading Kerala-based gold loan company had registered a 110 per cent growth in sales at Rs 1,098.41 crore and an 88 per cent growth in net profit for the quarter ended September 2011.

Another finance company from the same state registered a 133.6 per cent growth in its net profit for the first quarter ended June 2011 to Rs 107.83 crore compared with Rs 46.15 crore for the first quarter of the previous year.

According to the World Gold Council,Indians hold the largest stock of gold in the world — 18,000 tonnes of which is held by Indian households.

It is estimated that 7 per cent of India’s $256 billion in total household savings is currently held in gold. And the demand for the yellow metal is increasing despite the sudden spike in its price.