Gold lenders cut tenure and watch collateral as prices fall
Indian companies that lend against gold are reducing mandates and seeking more collateral to protect against falling precious metal prices.
Market leader Muthoot Finance Ltd. offers discounts on interest rates and other incentives to borrowers who choose to repay monthly or more frequently. Rival Muthoottu Mini Financiers Ltd. mainly lends for 90 days compared to 270 days previously, and most large companies are paying amounts well below regulatory limits, which were 75% of the metal’s value for shadow lenders and 90% for traditional banks until March 31.
Gold loans have exploded over the past year as small businesses grapple with deadlock by promising family jewelry that is a staple for nearly every Indian household. Muthoot Finance, for example, saw these loans increase by 25% over the period and the company holds 146 tonnes of gold, more than the official reserves of Singapore and Sweden.
“People are sentimental about their jewelry,” said George Muthoot Alexander, Managing Director of Muthoot Finance. “They will never want to default despite a drop in gold prices as they intend to get their promised adornments back.”
Gold posted its first quarterly decline in more than two years amid improving expectations for the global economy and weaker demand for exchange-traded funds. The metal fell around 10% in 2021 as investors swap safe havens for assets that will benefit from the economic recovery.
The biggest concern, however, is that a new wave of infections in India could derail business plans and force even the most diligent repayers to default.
“We review our portfolio and market valuation levels daily to see if further action is needed,” said Mathew Muthoottu, Managing Director of Muthoottu Mini Financiers.
India’s gold lending market will grow by at least 34 percent to reach 4.6 trillion rupees ($ 61 billion) in the two years to March 2022, according to an estimate by KPMG. The segment’s bad debt rate is around 1% compared to 7.5% for the banking sector as a whole.
“Although there is a fall in the price of gold and among the normal risk parameters, security would have reduced, the economy is opening up and this is not a crisis situation,” World Gold Council India Managing Director PR Somasundaram said. “People are eager to take loans because all businesses are coming back and small businesses depend on gold loans for quick access to capital. “