In your interest.
Online Personal Finance Magazine
No beating about the bush.
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)
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.
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.
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.
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.
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.
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.
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.
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.