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Moneylife » Life » Public Interest » Gold loan companies and their murky underbellies

Gold loan companies and their murky underbellies

Debashis Basu and Aaron Rodrigues | 22/11/2010 04:20 PM | 

gold-loans

If you thought loans against gold were the best thing to happen to mankind since sliced bread, think again. We made trips to various branches of companies which profess to offer ‘quick’ loans against the yellow metal and this is what we unearthed

Over the past few months, advertisements on gold loans have been visible everywhere, from companies like Muthoot Finance, Muthoot Fincorp and Manappuram Finance. These advertisements make pawning gold as easy as eating a piece of cake.

They appeal to all those who need money but only have assets like a house and gold jewellery. Our homes are our most important asset, and gold comes in as a close second. Since pawning a house is tough, pawning gold seems like the easiest option. India is a country which worships gold. Therefore, loans against gold have a mass appeal. At a time when gold is retailing at Rs18,000 for 10 grams, it is easy for people to pledge their gold and raise money. No wonder gold loans are doing roaring business.

A few of these companies are so profitable that they have been able to attract private equity investments. Manappuram is listed on the Bombay Stock Exchange - its shares have shot up from Rs13 in April 2009 to Rs113 (on 12th August), thanks to vigorous growth in turnover and profits. In the June quarter of this fiscal, income surged 177% to Rs18,607 crore while net profits zoomed 225% to Rs4,615 crore.

All the three companies mentioned above have their origins in Kerala, but now have massive nationwide operations. However, it is hard to figure out if their self-proclaimed growth numbers are authentic. Muthoot Fincorp claims that it has a simple and uncomplicated procedure that ensures that you have your loan in 3 minutes depending upon the documents.

Moneylife visited all these companies (their Mumbai branches). More on that later.

At the Muthoot Fincorp branch, the sales assistant that we spoke to said that it would take at least 10 to 15 minutes to grant a loan. Such claims are also made by other companies, with Muthoot Finance saying that it would take 5 minutes to get the loan against gold on its website. Not so, in fact it would take 30 minutes and that too if we came in the morning, said its sales assistant. While Manappuram says you'll get the gold loan within a minute, its sales assistant says that you may get it probably in 15 minutes.

But how solid are these gold loan companies? They function as non-banking financial companies (NBFCs) but how closely are they regulated by the Reserve Bank of India (RBI)? Where do they get the money to loan you? If it's borrowed money, could they suffer from an asset-liability mismatch under financial stress? How robust are their business models? Are they reliable? Is your gold safe with them? If gold prices fall, would they sell your gold and recover their money? If not, would they resort to strong-arm tactics? What are the social implications of a failure of these schemes as gold loan companies get larger and larger?

When we started looking at these questions, we discovered to our utter surprise that there has been no thinking along these lines so far. So, Moneylife started to investigate all these issues. The result of this is a three-part investigation. The first part, which follows, is an actual description of how the branches of these three companies lending gold actually function. They all have their branches in Andheri, a bustling suburb of Mumbai. The second part, to be followed a few days later, will examine the financial model of Manappuram Finance whose financial data is available since it is a listed company. The third part will examine the quality of supervision of these NBFCs given that they have become so ubiquitous and large that their failures will cause a lot of turmoil.

Last week, our correspondent Aaron Rodrigues made a trip to the Andheri branches of these three gold loan companies. His first stop was Muthoot Finance. Located very close to Andheri station, its office is on the second floor of Jyoti Estate. The Muthoot Finance branch is surrounded by a clutch of residential buildings, but unlike the other branches of these financial companies, it wasn't deserted. Here is our correspondent's first person report.

The Muthoot Finance branch is small and cramped. At 3:15pm, a few customers were inside the office, either to give some gold or take some of their gold back. The sales assistants are busy and you can hear one customer grumbling loudly; he feels cheated. "I didn't ask for so much of a loan, and what is this rubbish of paying the interest and the principal. It's like I have given more money, then taken (less) money," he says. It's chaotic, at first sight.

Finally I get a chance to speak to a sales assistant. She explains to me how the scheme works. The company will take my gold, give me some money and charge me an interest of 2% per month, making it an annual rate of interest of 24%. The loan is branch-specific. If you give gold to one branch then you can redeem it only from that branch. This is contrary to what most of these companies say in their websites - that the customer can redeem the gold from any of their branches.

Under the scheme, you hand over the gold to the branch and the outlet will provide you with cash. If you have gold worth Rs50 lakh and above, then you are given cheques.

She wants to know how many grams of gold I have. I ask her if gold prices were to drop, would that have any impact on my interest amount and principal amount. Her answer is short, "No. Nothing changes when you have taken the loan. Sir, how much grams of gold do you have?" I ask her if I can't repay the loan amount then what? Again, she tells me with her reassuring smile, "Sir, if you can't pay your interest for nearly 18 months, we will put up your gold for auction."

This branch doesn't look all that secure - there is just one guard at the door, there aren't any other security personnel and no camera that I could spot. Is it really safe to have your gold stored here?

The sales assistant again wants to know how many grams of gold I have. I tell her I have 200 grams of gold. But why is she asking me how many grams of gold do I have and not how may carats worth? I tell her, "I have 200 grams of gold and they are all 24 carat worth."

"So you have 200 grams of gold. That should give you a loan of nearly Rs3 lakh," she replies. "I don't need that high a loan, all I need is Rs2 lakh for my sister's operation. So how much gold would I need to give?" I ask. After using the calculator, she replies, "Ok, so you would need to get nearly 150 grams of gold as we measure it (the loan amount) as 1 gram of gold being equal to Rs1,430."

I ask what about the quality of gold? Doesn't that affect the value and the loan amount? It doesn't; the loan value depends on weight. Another key factor is that any gold below 22 carats is not taken for consideration when it comes to a gold loan.

I move to other branches. Unlike Muthoot Finance, these were deserted and were at odd locations. Take Muthoot Fincorp. Its branch is at an industrial estate.

Others occupiers there are mechanics and grain suppliers. When I reached Muthoot Fincorp, it was nearly 4:30pm. Almost time to shut shop. However, I have made my way inside, requesting the guard that I need some details. From what I saw there only three persons were in the branch office, aside from the guard. I walk down to meet the sales assistant, who tells me to sit down and starts explaining the Muthoot Fincorp scheme. The scheme is similar in many ways to that of Muthoot Finance. The only difference is that this scheme gives you the option to pay your interest in a monthly, quarterly, half-yearly or yearly basis - all with different interest margins.

Again, your gold will not be auctioned before 24 months. But what scares you is the location of the branch - and the lack of security.

As per their scheme, the customer is charged 2% per month. Again here the weight of the gold is paramount. I tell her that I have 24 carats of gold. Her reply is that her company evaluates the gold on the basis of its weight (not its purity). Only if you have a gold coin, will the gold amount be measured on the basis of the purity of the yellow metal. For example, if you have a 24-carat gold coin, the loan amount will be based on the (24 carat) purity.

However, for gold jewellery the loan depends on the size of the ornament. If you have a gold ring or earring worth 22 carats, the loan amount that Muthoot Fincorp will give you would be Rs 1,350 for a gram. But for larger-size jewellery like a gold bangle, the amount would be Rs 1,450 per gram. If you are carrying along 24-carat gold for a loan, then you better have a gold coin. This will enable you to get a loan amount of Rs1,700 per gram.

Manappuram's branch is located on the Western Express highway, but it is isolated. The building is rundown. All the stores in the building are shut, except for a solitary ATM. As you enter, there is a very dim light guiding you to the office. The guard sitting at the door tells me that the servers are not working. I request him to let me in as I just want details.

The moment you enter, you see a very different office from the ones you have seen before. There are fans running, but no air-conditioning. Some windows are broken and there are paan stains on its walls. There is a room, (actually with a lock). I wonder if it may be the room where the gold is stored.

The usual questions were asked. The person I first spoke to didn't have any knowledge of the schemes, so his colleague intervened. And this is a listed gold loan company.

The loan amount would depend upon the weight of the gold. Manappuram values loan against gold per gram at Rs1,400. However, they only consider 90% of the total weight of gold being submitted for a loan. This would mean your actual loan amount is Rs1,260. The total monthly interest you will pay under this scheme would be 1%.

However, if you want a higher amount of loan against your gold, there are a few more schemes (which charge you higher interest). For a monthly interest of 2.17%, Manappuram will provide you a loan of Rs1,450 per gram (after deducting a margin of 10% as explained above). The interest payout is similar to that of Muthoot Fincorp. You can pay your interest on a monthly, quarterly, half-yearly or yearly basis - which will obviously impact the actual interest that you are paying out.

Again, on 14th August, I made a trip to Muthoot Finance's Mahim branch. The branch is at Ram Mahal Co-operative Housing Society, opposite the railway station. It is near an HSBC ATM machine. I enter the branch by 9:45am. It has just opened. There's a solitary customer in the branch, apart from the staff and a security guard.

As usual, I ask the same questions. Unlike in the Andheri branch (where I was informed that the rate of monthly interest on the loan would be 2%), here they tell me it's 2.04%.

After all the formalities I tell them that I would visit the next day, a Sunday, with my gold. I am told that the Mahim branch is closed on Sundays. This seemed odd, because when I had visited the Andheri branch, I saw a poster stating that they were open on Sunday. A sales assistant confirmed that their branch was open on Sunday. Now why should the Mahim branch be shut on Sunday? The Mahim sales assistant tells me, "It's as per company rules and all branches are not open (on Sundays)."

(In the second part of this three-part series, we will examine the financial model of Manappuram Finance whose financial data is available, since it is a listed company)
 


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68 Comments
jacobwilliam

jacobwilliam 11 months ago


At last a got loan from this God fearing agency called merchant loan:via:merchantloan@outlook.com

Have a Nice Day

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Amandeep

Amandeep 1 year ago

India is a country that worships gold and it is easy to make money by placing gold as collateral. Lots of companies offer cheap Interest Rates on Gold Loan. It is the simplest way to make money in times of need. It is a handy option to acquire cash at low rates.

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indigo

indigo 2 years ago

it is really scary, they have so many offices and no organisation and no reassurance for the customer, it is better to sell your gold and be at peace, because the mental agony of regular changes can be too much

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Jerald

Jerald 2 years ago

I received money from manapuram gold loan. i start a business very loss. i enough money my gold how many days life

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N Bhargav

N Bhargav 1 year ago in reply to Jerald

Sorry Gerald. I didn't understand the last part of your comment. That is "i enough money my gold how many days life". What does that mean?

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Sunil M S

Sunil M S 2 years ago

"This is to inform that Manappuram does not check the ownership of the gold ornaments. A thief can also pledge gold with them as it has happened in a case in Mumbai.....Mind you stolen gold may find place in Manappuram."

Reserve Bank's Know-Your-Customer (KYC) guidelines are applicable to Manappuram, Muthoot, etc., like any other player in the financial sector. ID proof and address proof are the main requirements of KYC guidelines. Anyone who submits the KYC documents can avail himself of a gold loan from these companies. As to ownership of the ornaments, the application form contains a declaration to that effect. Once the applicant signs that declaration, the company accepts it. This is the standard procedure among banks even. If the declaration is not obtained, it will be a lapse and the officials concerned at the bank or gold loan company may be liable to be accused of colluding with the thief.

When anybody realizes that his gold ornament has been stolen, the first thing he should do is to file a petition with the police. If the police traces the ornament to a bank (or a gold loan company), they, the police, will issue an order, duly signed by an appropriate police authority, take the ornament into custody, and issue to the bank (or the gold loan company) a proper receipt for the ornament.

The bank can recover the dues under the loan from the borrower, i.e., the accused. In case all their attempts to recover the dues from the borrower fail, the bank can claim the dues from the insurance company, which has given the bank the insurance coverage. Ditto, for the gold loan companies.

"When the lady through her legal counsel asked for details and inspite of narrating her plight was replied arrogantly by Mr. Sarathlal that the Company cannot give details to third parties."

Financial institutions are legally bound to maintain secrecy of their client's accounts and deals. In case any financial institution violates this rule, and the violation is proved, the client can legally seek and obtain damages. Here too, the bank will have to abide by an order and furnish details if the order is issued by an appropriate police or other authority.

"It is high time RBI takes notice of such rogue elements."

This is the result of a lack of understanding of the legalities involved.

"Chit funds originated from Kerala and the middle class got looted of their earning in the 60s and 70s."

If the implication is that Manappuram and Muthoot are no better than those chit funds which cheated investors, nothing can be far from the truth. The Manappuram General Finance And Leasing Ltd appears as the 286th while the Muthoot Leasing & Finance Ltd appears as the 326th in the "All India list of NBFCs including RNBCs, to whom Certificate of Registration under Section 45 IA of RBI Act, 1934 have been issued by the Reserve Bank of India to hold / accept deposits from public. (Position as on July 31, 2004)", as per the RBI's website. The URL is: http://www.rbi.org.in/scripts/Publicatio.... Every financial institution has to display its licences prominently in their places of business, for all to see.

"Manpower supply to Gulf originated from Kerala who brought human trafficking in the 80s....."

A large number of Keralites are employed in various countries in the Gulf. They send part of their earnings to their dear ones back home. The inflow of funds from these Non-Resident Indians (NRIs) has been one of the economic pillars of Kerala. As to human trafficking, if anyone has reliable information about any human-trafficking out of Kerala, I would suggest the details to be conveyed to the Kerala Police. They do have a website, too, just the post the details on it.

".....now it is the gold loan."

All the Kerala-based banks have been granting gold loans for more than 50 years now. (Gold Loans are not common in the North Indian states.) For banks, gold loans are just one of the forms of credit they give. But Manappuram and Muthoot open branches mainly for granting gold loans. Seeing the success of Manappuram and Muthoot through gold loans, some of the banks have started opening mini-branches exclusively for gold loans. The rates of interest which Manappuram and Muthoot charge under some of their gold loan schemes stand good comparison with banks'. However, the rates of interest under some other schemes may be high. So far as I understand, the longer the loan-period, the lesser the rates of interest, and the shorter the loan-period, the higher the rates of interest. When the loan period is shorter, the borrower gets more amount per gram, and when the loan period is longer, the borrower gets lesser amount per gram. All these schemes are transparent and the details are available at all their branches. There are no hidden costs.

"Beaware your gold is not safe here."

Manappuram and Muthoot have all the security and safety measures often bank-branches have, and even more. Some of their branches even have full time remote surveillance. Gold ornaments pledged with Manappuram and Muthoot are as safe as, or even safer than gold ornaments pledged with banks.

"Read about muthoot and Manappuram more. Invest cautiously or you may end losing all your gold....."

If the advice is about investing in these companies' shares, study the results, track record of the shares in the stock market, gold-market, and various factors affecting economy, etc., and so on; such study has to be essentially done before investing in any share for that matter, be it Reliance, ICICI Bank, or any other.

"...and find such stolen gold with these companies."

This point has already been explained.

I do not have any relations with either Manappuram or Muthoot. I just happen to be familiar with the financial sector in Kerala.

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bsian

bsian 2 years ago in reply to Sunil M S

Dear Sunil,

Thanks for your valient support to the cause of Mutoot and Manappuram. Lets see who is having the last laugh. Only Time will say. What a way to support these companies by a person who is "only just happen to be familiar with the financial sector in Kerala".

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Sunil M S

Sunil M S 2 years ago in reply to bsian

I was a part of the largest Kerala-based private sector bank for a long time and have thus been familiar with the financial sector in Kerala in general and gold loans in particular. Ever since the gold loan companies started growing fast, and captured a lot of financial space inside and outside the state, I have been interested in them too. Even otherwise, most people in Kerala are familiar with gold loans. In case you have any issues with the Kerala-based gold loan companies or banks, please feel free to write to me; my email ID is sunilmssunilms@hotmail.com. Having been experienced in the sector, I might be able to give you the right advice. Free of cost, of course.

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bsian

bsian 2 years ago in reply to Sunil M S

Tnx for your noble gesture for troubling yourself to give free advice. We have already began the legal proceedings and have established to Manappuram without doubt that these gold ornaments have been stolen. It is seen that a large quantum of such stolen gold is finding itself into mutoot, Manappuram and karvy finance. One can only pray that it does not go like the Harshad Mehta scandal. Talking of chit funds many have got cheated with star of cochin, sudharshan chit funds, Nedungady chits etc in Mumbai. Personally even my family has lost in the chit fund of Star of Cochin in 1970s. Hope there are tighter laws to secure.

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Sunil M S

Sunil M S 2 years ago in reply to bsian

Kerala is a land of contradictions. Its chit funds are an example. As you have rightly mentioned, a large number of chit funds have gone bust in the state. At the same time, there are several chit funds which have been operating without issues for several decades altogether. Several such chit funds can be seen in Thrissur district. They command great public faith. Such funds are notable for their insistance on adequate security and prompt repayment by customers. Chits which intend to cheat later, can be identified by several traits: offer of high return and incentives, easier terms for release of chit-amount (often demands little or no security), and so on. Some of these may even be high-flying and may have a number of sister-concerns. Despite a series of bitter experiences, public swarms around such unscrupulous chitfunds, attracted by the offer of high returns, incentives, easier terms, etc., and at some point of time burn their hands. Chit funds do not, so far, as I know, fall under the purview of Reserve Bank. Instead, they are governed by the state govt's statutes. The funniest part is, when many of these chit funds begin new chits, they do so from their branches in faraway states, usually in the north even in J&K. This helps them to make short shrift of Kerala govt's chit-related statutes which require a large portion of the initial collection to be deposited with the govt., and a number of stringent formalities to be complied with. Though a number of reputed chit funds still operate well in the state, my recommendation will always be to avoid them in toto.

As to the mention that a large quantum of stolen gold is finding its way into the gold loan companies, I think the incidence of spurious gold ornaments is the greatest menace the gold loan companies and gold loan granting banks face. Some of the fake ornaments look quite genuine and when the outer gold plating is thick, the usual acid test may not reveal its true nature. The ornament will have to be cut and then tested with the acid to get to the truth. Such tests will be difficult as the customer, if genuine, will find it painful to see their ornaments cut-tested. There are localities in Kerala where such fake ornaments never get pledged. On the contrary, there may be places where fake ornaments are, rather, common. In other states too, there may be localities which are more honest than other localities. Fake ornaments will be a drain on the company, as they may not get reimbursed by the insurance companies.

Stolen gold ornaments getting pledged with these gold loan companies and banks must be rare, thanks to RBI's KYC rules and, this may be equally effective, the practice of the borrower being photographed across the counter. There may be a computer-linked video camera on the gold loan counter directed at the applicant. Before granting the loan, the video camera will take his photograph and the system will capture it. I am not sure whether banks have it, but the gold loan companies are having it, or, at least, many of them. The photo will help the police to nab the culprit faster. However, a thief who boldly complies with KYC and other rules, will still be able to pledge stolen ornaments and take gold loans from both banks and gold loan companies. Once these rules are complied with, the financing institution will not have the risk of being charged with colluding with the thief. When the lending institutions' actions are bonafide, they will not be held guilty. The KYC rules are compulsory even for private money lenders who lend against gold ornaments.

However, the point I want to make here is different; it is this: the customers' ornaments, pledged with Manappuram and Muthoot are safe and will be returned when the customers redeem them after repaying their dues in accordance with the agreed terms. Theft of customers' ornaments from the hands of banks and gold loan companies will be an unlikely event. In case you belong or once belonged to Kerala State, please take pride in Manappuram and Muthoot.

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