Gold loan companies and their murky underbellies

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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    COMMENTS

    jacobwilliam

    7 years ago


    At last a got loan from this God fearing agency called merchant loan:via:[email protected]

    Have a Nice Day

    Amandeep

    8 years 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 http://www.dialabank.com/article.cfm/art...;>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.

    indigo

    8 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

    Jerald

    9 years ago

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

    REPLY

    N Bhargav

    In Reply to Jerald 8 years ago

    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?

    Sunil M S

    9 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.

    REPLY

    bsian

    In Reply to Sunil M S 9 years ago

    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".

    Sunil M S

    In Reply to bsian 9 years ago

    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 [email protected]. Having been experienced in the sector, I might be able to give you the right advice. Free of cost, of course.

    bsian

    In Reply to Sunil M S 9 years ago

    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.

    Sunil M S

    In Reply to bsian 9 years ago

    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.

    bsian

    9 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. The man pawned the gold ornaments of his wife and mother inlaw with manappuram- Aurangabad branch and got money. 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. Mind you stolen gold may find place in Manappuram. It is high time RBI takes notice of such rogue elements. Chit funds originated from Kerala and the middle class got looted of their earning in the 60s and 70s. Manpower supply to Gulf originated from Kerala who brought human trafficking in the 80s now it is the gold loan. Beaware your gold is not safe here. Read about muthoot and Manappuram more. Invest cautiously or you may end losing all your gold and find such stolen gold with these companies

    Raja Verma

    10 years ago

    I am a customer of Muthoot Finance. The staff is very cooperative. You say that it takes 30 mins to get a loan. In which bank do you get loan so quickly? Besides if i do not pay the interest it the co. which is losing. The gold in Muthoot Finance is insured. Next time before commenting kindly be sure of the facts.

    gunjan

    10 years ago

    GOLD LOAN

    Sunil M S

    1 decade ago

    “…and their murky underbellies….and this is what we unearthed”

    The sensational heading and the first paragraph had promised a coup of some sort in the article that followed. I eagerly lapped it up, but was disappointed. Nothing in it was sensational let alone murky. I had the opportunity to view ‘Manappuram’ from close proximity. True, their rates of interest are higher than banks’; that is a serious disadvantage but that, perhaps, is the only disadvantage. But then, banks like ICICI Bank and HDFC Bank are more usurious when it comes to personal loans.

    Once I witnessed the disbursement of a gold loan at a Manappuram branch. The customer came in, handed over the ornaments to the appraising official (who immediately started testing them), the ID proof and address proof to another official (who immediately scanned and uploaded them onto their network) and, then, signed the application form. The next moment, he received payment from the cashier, and, on his way out, collected the loan-token (computer printout) & IDs. All this must have been over in less than three minutes. Release of gold ornaments could be even faster. In short, gold loan companies like Manappuram are generally faster than banks.

    That is only one of several advantages. There is another one, somewhat psychological. A bank has two kinds of customers, mainly: depositors and borrowers. Since depositors are bank’s source of funds, they may get a better attention than borrowers. On the contrary, gold loan borrowers are the customers for companies like Manappuram and do not have to wait.

    Further, the gold loan companies give more amount than banks for the same ornament. Many branches of Manappuram are open on all seven days of the week. As to safety, some of the gold loan companies are installing surveillance systems with which they can, sitting at HO, do live monitoring of branches in other states and sensitive areas, and take immediate measures whenever needed.

    Words like “murky”, “unearthed,” used in the article, are out of place.

    Amit Pal Singh

    1 decade ago

    I have suffered at the hands of M/s. MUTHOOT FINANCE LTD. (The Gold Loan Company) & now I have accumulated quite some knowledge as regards their modus operandi & their dealings? The whole information can be mailed to you if you like.

    Thanks
    Amit Pal Singh
    New Delhi
    0-9873341430

    REPLY

    Mr Vicky

    In Reply to Amit Pal Singh 10 years ago

    PLZ SEND ME THE INFORMATION

    rufus john

    In Reply to Amit Pal Singh 1 decade ago

    hi could you mail me the information

    sunil date

    In Reply to Amit Pal Singh 1 decade ago

    Mr AP singh, I am sorry to know that you have suffered but I am curious to know how. My E mail id is [email protected]

    sunil date

    In Reply to sunil date 1 decade ago

    No reply Mr AP Singh ?

    Sunil Date

    1 decade ago

    Mr D Basu & Mr A Rodrigues. Pl see my comments and the replies by Mr R Nandakumar. I am still unable to understand the risk for the "BORROWER", if the Gold loan company goes bust or vanishes. Can you please clarify.

    Sunil Date

    1 decade ago

    I go to a bank and take a loan against my FD. I go to a bank and pledge my shares and take a loan. I go to a gold loan compny and take a loan against my gold. How does it matter to me if the co goes bust. I have got say 70-80% of my gold value as a loan. So the risk is for the 20 to 30 % only. It is the gold loan company which carries the risk that I may not pay back. If the gold prices fall & I don't pay they are in trouble. Your article says that thay take loans from Pvt equity firms for their funding. These pvt eqty firms should be worried. Why should I worry ? Can any one explain ?

    REPLY

    R Nandakumar

    In Reply to Sunil Date 1 decade ago

    When one conglomerate has lorry loads of money it is worried about inflation especially when the official rate itself touches 16%. (Generally any central govt would be reluctant to admit any inflation figure of more than 10%.). Gold is one of the best bets at the time of inflation. So they collect Gold from you which is appreciating and give you paper money that is depreciating faster. This conglomerate by this devise not only ensures safety of its money but also makes an handsome profit of minimum 15%. And they are controlled least because they are NBFCs.

    Sunil Date

    In Reply to R Nandakumar 1 decade ago

    When does one pledge gold ( ornaments) ? When one is in dire need of money and other avenues like bank etc are closed. At that point does it matter to the borrower, if the gold loan co goes bust ?
    I agree that if it is a loan taken for repaying some other loan or for gambling etc it is not a prudent way. But the question in the article is not about whether it is right or wrong to obtain money in this way. The article is about the risk of the gold loans co going bust or vanishing.

    R Nandakumar

    In Reply to Sunil Date 1 decade ago

    Kindly note that RBI unless brings out stringent laws on these methods of money distribution there are bound to be scams. The comments in these coloumns only reflect the fervant hopes of the writers that another scam should not happen and gullible public should not suffer.

    sunil date

    In Reply to R Nandakumar 1 decade ago

    If you are refering to the borrowing public as the gullible public, kindly let me know how they will suffer if the Gold loan companies go bust or vanish.
    If you are refering to the investing public in these companies then I do agree that they may suffer.

    R Nandakumar

    In Reply to sunil date 1 decade ago

    A borrower becomes gullible when he is desperate and does not hestitate to choose any avenue just to get that needed money. He becomes gullible because compared to a schduled bank the risks involved are more. And that is why he is ready to comprise his capital by 30% or more. Hypothetically it would be interesting to watch these NBFCs reaction if gold were to be loosing its price and reach 2007's price.

    sri

    1 decade ago

    I guess, the plan of these companies is to BUY Gold at cheaper rates around 1300/gm against market rate of Rs.1750, earn big money in form of interest and Vanish one fine day.

    Deepak

    1 decade ago

    In North India pledging gold is considered a taboo, a last resort during bankrupctcy, while gold loans are common in South India- the cultural reason why Kerala promoted companies are leading. It would be interesting to see their profile of customers, are they also predominantly South Indian. The business model seems simple like lending against pledge of shares.

    How these NBFC manage operational and fraud risk is important. Do they declare to the regulator where the gold inventory is placed and what are loans against this inventory?, When are margin calls issued?, Is the gold insured?,

    Ramesh Sopan

    1 decade ago

    for the"freedom" we can say JAY HIND & celebrate Independence day.... Just enjoy the spirit of freedom with dignity & pride.

    The remarkable financial pyramid of gold loan companies

    In this second part of our investigation into the workings of gold loan companies, we delve into the financial model of an industry leader, Manappuram Finance, which is listed on the BSE

    Going by their recent blockbuster performances, it would seem that gold loan companies are poised for exponential growth for a long time to come. Many of these companies have been quoting astronomical growth figures, supported by unrelenting demand from a public increasingly looking at gold more as an investment than as a piece of jewellery. Indeed, players in the gold loan business are increasingly trying to spread awareness on how lower income families can leverage their gold holdings instead of keeping their valuables idle or borrowing at sky-high rates from pawnbrokers.

    Leaving aside Manappuram Finance, other prominent non-banking financial companies (NBFCs) like Muthoot Finance and Muthoot Fincorp are not yet listed entities, and hence do not need to disclose their financials to the public. But their performance too, by all accounts, is very good. The question is, would these growth figures remain robust under changed circumstances, such as a significant fall in gold price?  

    Let us try to get a grip on the financials of these companies by looking at the only listed entity - Manappuram Finance. This Kerala-born company has been on a phenomenal growth curve for over a decade now. Over the past five years, its revenues have surged 2,322% from a modest Rs19.74 crore as on 31 March 2006 to Rs478.2 crore as on 31 March 2010. Profits have zoomed 2,923% in this period, from Rs3.96 crore to Rs119.72 crore. The company's loan book has grown by leaps and bounds from Rs63.16 crore to Rs1,890.71 crore during this period.

    This fantastic growth momentum has continued in the June quarter of the current fiscal year. Income surged 177% to Rs186 crore while net profits zoomed 225% to Rs46 crore over the corresponding quarter last year. Thanks to such vigorous growth in turnover and profits, Manappuram's shares have shot up from Rs13 in April 2009 to Rs116 (on 19th August). By the end of the June quarter, the company's loan book stood at Rs2,681 crore. The management has indicated that they plan to achieve a size of Rs8,000 crore by the end of this fiscal year.

    What makes this business so lucrative is the sizeable spread that the company can earn and the low non-performing loans, until now. For Manappuram, the spread between the yield on advances and the cost of funds is as high as 16%. Another highlight of the business is the strikingly low incidence of non-performing loans (NPLs). Apparently, gold loans rarely become NPLs primarily because of the low average loan duration, the desire to repay the loan and reposses the jewellery and the ease of disposing the jewellery for loans which are defaulting. Manappuram's gross NPAs stood at a mere 0.19% of the total assets for the June quarter.
    Where do NBFCs like Manappuram get the funds to loan you at an
    ever-increasing pace? Unlike traditional NBFCs, they do not rely on fixed deposits. Of late, they have also attracted attention from private equity players. Last month, Muthoot Finance raised Rs157 crore through private placement from leading PE firms Baring Private Equity Partners India and Matrix Partners India. Over the past few years, Manappuram has also received patronage from several PE firms including Sequoia, India Equity Partners, Ashmore Alchemy and Granite-Hill. Manappuram received around Rs70 crore from Sequoia and India Equity Partners in 2008, with another Rs70.8 crore coming into their books in 2009 from Ashmore Alchemy and Granite-Hill, together with the previous PE investors. This year, Sequoia exited the company with returns of nearly 7.4 times. In May this year, Manappuram made a placement to Qualified Institutional Investors raising Rs245 crore. According to a report in the Economic Times today, Manappuram is further looking to raise Rs1,000 crore through the QIP route in the third quarter of this fiscal. This fund-raising spree is the outcome of an ever-increasing gold loan book.

    But while this can explain the fact that lenders would be more confident in dealing with Manappuram, it does not explain the main source of funding. After all, Manappuram has a loan book of around Rs2,000 crore and we are talking of a few hundred crores raised from PE investors.

    Look at the balance sheet and you will find that the source of funds for these companies is mostly borrowings from banks, bonds, debentures or commercial paper and also private equity funds. On 31 March 2010, Manappuram had advances of Rs1,891 crore. The majority of this was gold loans. This was funded by equity capital of Rs34 crore, reserves of Rs576 crore (including share premium reserves) and loans funds of Rs1,836 crore. The bulk of the loan funds was secured borrowings from banks (Rs1,367 crore) and funds through bonds/debentures (Rs262 crore) and commercial paper (Rs65 crore). It is worth focusing on what is the security that Manappuram has given to get a "secured" loan? After all, it has no productive assets. Fixed assets including intangibles amount to only Rs57 crore. The gold in its locker does not belong to the company. Well, the answer to this question leads us to the very secret of the current success of gold loan companies.

    As we found out, some 90% of Manappuram's borrowings are secured against the very loan it gives out, in a remarkable case of pyramiding. Banks are funding its receivables arising out of gold loans even though the underlying gold does not belong to it. In effect, thanks to an interesting piece of financial engineering and support from banks, the gold people loan out to Manappuram becomes an asset for the company! This looks like a pyramid scheme but everyone believes that the pyramid will not topple as long as the going is good. While we have no forecast on the price of gold, we certainly believe that a business model, built by pyramiding money, entirely based on the speculative price of a single product, has huge potential risks. What are these risks? That's in our third part.
     

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    COMMENTS

    monika

    8 years ago

    The above information gives prescribed information about the gold listed companies. I totally agree with the above statement Manappuram and Muthoot performance are good but now the gold prices become lower than what circumstance will occur in the gold market. http://goo.gl/6cA5w

    vikasarora

    10 years ago

    ?? This article is full of mistakes, and misleading information. Skewed in order to make some kind of a sensationlist headline.

    james

    1 decade ago

    thanks for providing details of exactly how a gold loan company works.

    TD

    1 decade ago

    In case of banks/finance companies, Loans and Advances will be the major item in assets side of Balance sheet.
    Home Loans for Housing finance, Vehicle Loans for Vehicle Finance, Gold Loan for Gold Loan Company
    The money raised by banks/finance companies in the form Deposits,NCDs,Bank borrowings,CPs etc.. for providing Loans are secured by a charge on the recievables/Sundry Debtors and not by House,Vehicle,Gold Jewellery which is the property of individual borrower.
    Where is Pyramiding? Rubbish.

    REPLY

    joseph

    In Reply to TD 1 decade ago

    TD is right. these companies have the highest corporate governance and the best today for long term investment. their owners are doing god's work.

    Kumar

    1 decade ago

    I agree with Mahesh. The authors have not explained why they call this 'pyramiding'.

    REPLY

    manikkan

    In Reply to Kumar 1 decade ago

    gold loan companies are serving a social cause. their owners should be given padma bhushan

    Raghu G

    1 decade ago

    Indians have close to 15000 tonnes of gold under their custody, the value of the same will be close multiple trillions, and these NBFC plays a crucial role in unearthing these treasure and injecting the same to the financial system, and now these NBFC have gold close to 200 tonnes, if they grow at the current pace, within 5- 10 yrs of time these NBFC (GOLD Loan NBFC) will surpass few of the nationalised banks in terms of turnover, PAT and Wealth creation. I admit that Risk is there in this business, but these gold loan NBFC, espcially Manappuram are pioneers in GOLD Loan, and they have sophisticated method of Risk Management System, including hedging, fraud monitoring cells, Market Intelligence, sohisticated security system, and so on

    REPLY

    suveen

    In Reply to Raghu G 1 decade ago

    absolutely. perfect arguments.
    what would it take to change your mind? nothing? is it made up, fixed - under all circumstances?

    Raghu G

    1 decade ago

    Don't under estimate Gold Loan companies, above all these companies are NBFC and one of the priliminary function of a financial companies are borrowing funds and lending the same at margin, and if you can ensure zero percent NPA, this will be one of the best managed financial companies, for a financial companies, investment in fixed assets should be minimum and the maximum amount should utilised for lending, from this scenario these companies are excellent, so investment in these companies to my knowledge is very safe

    REPLY

    Suveen

    In Reply to Raghu G 1 decade ago

    One interesting strategy of successful investing is looking for the opposite fact. This is framed as: What would it take to change your mind? In other words, what should happen for you to think that gold loan companies are no longer safe?

    Praveen

    In Reply to Raghu G 1 decade ago

    You are correct , these NBFC are the future drivers of Indian Economy,

    thomas kuruvilla

    In Reply to Praveen 1 decade ago

    Manappuram and Muthoot are the next Reliance

    subramoney

    1 decade ago

    when an asset price goes up JUST because somebody else WILL buy it at a higher price, the scheme is a Ponzi scheme. A house has underlying cash flow (yes it may not justify the price), but theoretically if I am getting 5% return, it means in a WORST case scenario I can get the full price paid for the house come back to me in 20 years. Gold has not such supporting cash flow. Of course gold lovers say...see 4000 years history. Well we all know history repeats itself...we do not know how often and how many times.

    Cherian Verghese

    1 decade ago

    interesting analysis. waiting for the third part

    Tushar Choksi

    1 decade ago

    I appreciate the insight given by you
    atleast investor will think twice before investing in such companies. for your info muthoot is also listed.

    mahesh

    1 decade ago

    the authors dont seem to understand what "pyramiding" means. banks also provide loans to transport finance companies against the securities of the trucks which lies with the transport finance companies - doesnt mean there is pyramiding there. in fact all bank loans will be classified as pyramiding by these authors

    REPLY

    mahesh

    In Reply to mahesh 1 decade ago

    please read the last line as:
    " in fact all bank loans to HDFC will be classified as pyramiding by these authors"

    rajesh

    In Reply to mahesh 1 decade ago

    well mahesh the fact is the TRUCKS BELONG to HDFC till the last installment is paid
    THE GOLD HERE BELONGS to the debtor
    now is THAT diffrent enough for you to understand
    ps are you eapen

    Rajesh

    1 decade ago

    Gold is known for its big crashes? Are these people properly hedged or protected against any crash in gold prices.
    If such a crash happens, forget about the borrowers, what happens to the institutions who have lent to these companies?

    K Narayanan

    1 decade ago

    If the source of finance of the co is share capital,reserves including PE and bank finance then we shd not bother much.The co borrowing against the gold pledged by the customers is called refinancing in banking parlance and it is perfectly legitimate and permitted by RBI..Banks give loans to SMEs and get it refinanced by SIDBI(earlier for industrial loans they used to get refinance from IDBI).It is better than SKF micro finance getting bank loans at 12% and lending at 24%to small ticket borrowing where the security is the honesty and group guarantee of the poor people.The only question is how far the mgt is trust worthy.Well, it is like asking whether Tata finance and Shriram transport finance who have mobilized FDs would
    honour their commitment.It is for the banks to supervise the borrowers vizthe company and the end use of money by the co just like any other loan the banks give to individuals,traders,industries etc.

    Tony Joe

    1 decade ago

    Hi Mr. Unnikrishnan,

    What makes asset creation a great thing? If asset creation was the best thing in loans, how did the subprime crisis happen in US? All those loans were for the best asset creation - homes. And what makes you feel that money from gold loan can't be used for asset creation? Funds from these small-ticket gold loans are used for everything from buying cows, to leasing auto-rickshaws, to paying for children's education. The fact of the matter is that gold loans are the most secure of all loans. That also means that even Lehman Brothers and Goldman Sachs wouldn't have lost money on gold loans. But their bet was on asset creation, and see what happened. That is why safety-first players like Sequoia, Capital World, & Nomura made a beeline for Manappuram during the economic crisis, and this is continuing.

    PUnnikrishnan

    1 decade ago

    Your in-depth analysis is good. It was time somebody did an analysis on this subject. One reader has compared gold loans to housing loans or auto loans. In the case of housing loans or auto loans, a new asset will be created out of the loan which will be the prime security for the loaner whereas in the case of gold loans no such asset is created. About reputed PE funds putting their investment in the gold loan companies, one is only reminded of Lehman Brothers or Goldman Sachs which were also reputed names a year ago. I believe some co-operative societies/banks are also in the gold loan business but perhaps they are covered by the Societies Act and are regulated by the Registrar of Cooperative Societies.

    Home truths: Living by the rules

    Rules for co-operative housing societies have been in existence for some years now, but there is a serious lack of knowledge and understanding of these important guidelines even today. Mr Vimal Punmiya, a leading property expert, explained some of these issues at a well-attended seminar hosted by the Moneylife Foundation recently

    Vimal Punmiya, one of the leading property experts in the country, has underlined the importance of co-operative housing societies operating by the rules to safeguard the interests of resident members and the smooth functioning of day-to-day affairs.

    Mr Punmiya was addressing a seminar on co-operative society rules at a well-attended seminar hosted by the Moneylife Foundation recently. "In this state, the Maharashtra Co-operative Societies Act (1960) is the guiding legislation which covers co-operative housing societies (CHS) too. Model bye-laws were introduced for housing societies by the state government, in 1984, to facilitate functioning. These rules were improved through the new model bye-laws published in 2001," he explained.

    Mr Punmiya pointed out that co-operative housing societies can amend the bye-laws according to their requirements, and as per the procedure laid down for such changes, but these must be in line with the common interest of the members and have to be ratified by the registrar of co-operative societies. While older societies can continue to follow the old model bye-laws, new societies are expected to adopt and follow the new model bye-laws.

    Mr Punmiya also shared information with examples from his extensive experience of over three decades on matters such as stamp duty charges, registration procedures, income-tax and accounting practices, as well as wills, nominations and transmission.

    "In the co-operative housing society system the ownership of the building rests with the society and all members hold a certain share in it. The residents are superior to tenants, but inferior to a landlord as the society is the owner and not the individual," he explained.

    NoC for flat re-sale
    Giving an example of a change in the bye-laws, Mr Punmiya said that previously, a flat owner was required to apply for a no-objection letter from the society to sell his property. However, under the new bye-laws, the owner is free to sell the flat to anybody without requiring the society's permission. This is one reason why several societies had chosen not to shift to the new bye-laws, he pointed out.

    Owner and associates
    Another example is that of ownership. Under the previous rules, the person whose name appears on the share certificate of the society is considered the deemed owner, whereas the others whose names are also listed are termed 'associates'. There is a dichotomy here. For income-tax purposes, all persons whose names appear on the share certificate of a co-operative housing society are deemed to be the owners of the property, Mr Punmiya said. But the new laws recognise joint ownership.

    In Maharashtra, a daughter is considered a part of the family even after her marriage. But for the purpose of taxes, a married daughter is not included in the father's family. Under the new rules, if a flat is given to the daughter after her marriage, or if she stays in the flat after marriage, she is still using the property as a member of the family and, therefore, the society cannot charge non-occupancy charges.

    Nominations
    One other example of a change in the rules is nomination. In the old bye-laws, a flat owner could file a nomination form before death, whereas a legal heir could apply whenever he/she wants. But under the new bye-laws, the legal heirs must apply for nomination within six months, failing which the society has the right to refuse registration of the nomination. In such cases, the legal heirs can approach the registrar, who has the power to accept it, Mr Punmiya said.

    Structural audit
    Regular upkeep and maintenance of the building and premises is yet another important matter.
    According to the rules, any building that is about 15-30 years old must conduct a structural audit at least once in five years. Older buildings should be surveyed at least once in three years.

    Society expenses
    There are rules also on the limit of expenditure that a secretary of a society is allowed. Previously, the principal managing committee member was allowed to spend Rs300 at a time, for daily expenses, without having to seek sanction. That amount has been hiked to Rs1,500 for a society with up to 20 members, Rs2,500 for a society of 20-50 members and Rs4,500 for a society with more than 50 members.

    Resignations
    According to the new model bye-laws, in the event that a member/s of the managing committee, or the committee itself, resigns, the member/committee will continue to fulfil the responsibilities till a new member/committee is appointed.

    Transfer fee
    In the case of charges levied at the time of transfer of a flat, Mr Punmiya said that under the Maharashtra Co-operative Societies Act a housing society can levy a fee of up to Rs25,000 or 2.5% of the agreement value, whichever is lower.

    Income tax
    The Bombay High Court has ruled that under the concept of 'mutuality', the money that a society receives from a member is not taxable. However, receipts collected from non-members are taxable. So any revenue generated by a society from sources other than its members is liable for income-tax, Mr Punmiya explained.

    Member not traceable
    If a member is not traceable for a period of over seven years and has not paid the maintenance charges, the society can approach the registrar and initiate the process to take possession of the vacant flat. Previously, the society had to file a civil suit in such a matter. Similarly, if the flat owner passes away and no legal heirs come forward to claim the property, the society can take over such property.
     

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    User 

    COMMENTS

    psn atmaram

    10 years ago

    what about provision of sale of parking space since it is against the ruling of the Apex Court

    Nagesh KiniFCA

    1 decade ago

    As one present during the talk , i must say it was one of the most brilliant and lucid elaborations on the subject. Money life summarisation is very apt. Shall appreciate your making them as hand-outs for those unable to attend.

    sam varghese

    1 decade ago

    kindly confirfm the applicablity of filing of income tax return for coperative society if there is no income from other sources and regualar maintenance

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