Project Report On

Gold Loan Service in India

Subject: Management of Financial Services Submitted to: Dr. Sanjay Medhavi Submitted by: Mayank Raj MBA III sem. Roll no. 28

Department of Business Administration University of Lucknow

Introduction:
Gold considered an auspicious metal is opening up business opportunities in India. Largely driven by the unorganized segment in the past, most of whom included the pawn brokers, the gold loan market has now started to be driven heavily by the organized segment. The stigma attached to pledging gold is slowly thinning among people while companies are campaigning that gold is an effective assistant at the time of financial need. Express loan within 5 minutes is the most attractive feature of this loan product offered by almost all the market leaders. The Characteristic of the gold loan product is that the average tenor of the loan is about 90 to 100 days. Investors have found this product attractive with short term tenor. Moreover, the risk involved in the product is less. Gold loan companies offer loan against a LTV (loan to value) ratio of about 75 to 80% which makes it less risky. Any movement of gold prices that makes the value of the security to fall below the loan offered would make the company exercise a margin call or cancel and issue a fresh loan. The sentiments attached with the gold ornaments pledged also makes gold loan less risky With the success of many players, many institutions have identified that this business model is not hard to replicate. But in almost all the business models, one has to identify the sustainable source of competitive advantage. In case of gold loan market, 80 to 85% customers are repeat customer. Hence the source of competitive advantage would be the trust that private institutions can build over time and transparency in the process. The major running cost of the business model would include staff cost, advertisement cost, rent, bad debts and provision

for doubtful debts. Fixed cost would include the gold safes and other apprising equipments.

Gold Loans: A High Growth Industry :

According to ICRA Management Consulting Services Ltd.(IMACS), India is one of the largest market of gold accounting with about 10% of the world gold stock weighing 18000 tons of gold. Value of gold stock has been growing at about 22% (CAGR) since FY 2002 in India. According to Manappuram finance limited, the second largest market player in the gold loan industry, only about 10% of the gold available in India is used for gold loan leaving room for potential business opportunity. Southern India is the largest market accounting for 40% of Indias gold demand, followed by West at 25%, North at 20-25% and East at 10-15% of annual Gold demand.

Gold Loan Market in India:

There is a large unorganized gold loan market dominated by pawnbrokers and money lenders . Share of organized is growing rapidly with emergence of specialized NBFCs which we believe is due to Lower rate of interest; Aesthetics of branch; Safety of the ornaments and Fidelity risk avoided. Huge under penetration in India of Gold Loans. Southern region accounts for 85-90% of Gold Loans market in India. Organized Gold Loans in India have grown at 40% CAGR from FY02-10 and expected to grow at 33-41% CAGR in FY11.

Source: IMACS Report on Gold Loans Market in India 2009 and Updated Report on Gold Loans Market In India 2010

Gold Loan as a Product:

Loan against Gold Ornaments is a product designed to provide liquidity against gold ornaments without having to sell them. Gold ornaments lying idle can be put to productive use by availing Loan against Gold Ornaments. Loan will be sanctioned on submission of all the required documents and satisfactory assessment of gold ornaments. Loan amount is disbursed by cash; DD or funds transfer to an account (as the case may be). In the case of default in repayment, penal interest (as the case may be) will be charged around 2% per annum over and above the normal rate of interest. The product is packed with features such as: Hassle-free quick processing of loans. Simplified paperwork. Easy payment options. Attractive interest rate.

Gold loans (or deposits) are not backed by cash collateral and, in some cases, are not backed by non-cash collateral. However, the gold may be on-sold by the borrower. With Gold Loan, you can get an instant loan against your gold jewellery and ornaments. The procedure is simple, documentation is minimal and approval is quick.

Features & Benefits :

You can avail Loan upto Rs.20,00,000 & upto 80% of value for any purpose Safety & Security of your Gold Jewellery Loan processed in 30 Minutes ATL - Anytime Liquidity No EMI, Service only Interest and enjoy the Loan facility Lower Interest Rates Simple documentation and fast processing. Overdraft limit varies depending on the market rate of gold. Interest rate is payable only amount of the overdraft that you use.

Major Players in providing Gold Loan :

There are majorly four sectors that provide this service. These are: 1. 2. 3. 4. Public Sector Bank Private Sector Bank NBFCs Co-operative Societies

Financial institutions provide 70% to 85% of value of gold pledged as loan. The interest rates vary from 12% to 15.25% for banks whereas NBFCs offer between 12% and 21% depending on the value of the gold pledged. The time period varies from lender to lender, it can range from a couple of months to a year.

Banks and Non-banking finance companies (NBFCs) like Muthoot Finance, Muthoot Pappachan Group, and Manappuram Finance are few players who offer gold loans, that is, they sanction loans against your gold. Once one guarantees the gold, he can get a loan amount of 70-95% of its value.

Source: IMACS Report on Gold Loans Market in India 2009 and Updated Report on Gold Loans Market In India 2010

Gold Loan Schemes and Interest Rate:

Here are the some gold loan schemes provided by the major players in india: 1) By Muthoot Finance:
Scheme Name True Value Personal Loan (TPL) Super Value Personal Loan (SPL) Real Value Personal Loan (RPL) Express Personal Loan (XPL) Value (per gram) Rs. 1,035/Rs. 2,075/Rs 1,880/Interest (% p.a.) 12% 24% 17%

Rs. 1,985/-

21%

2) By Muthoot Fincorp: Scheme Name Express 3 min. Gold loan Value 90% value of Gold Pledged Interest Rate
The rate of interest charged is flat rate at the following slabs
Rate for 6 months Rate for 12 months Rate for 24months Rate for 36 months
14. 23% 13.47% 13.45% 13.74%

Smart plus Gold Loan

90% value o Gold Pledged plus some add on.

Same as above

3) Manappuram Gold Loan: Manappuram gold loan interest rate is low compared to local NBFC finance companies which charge 20 25%. Manappuram provides up to 1 cr. loan on please of gold jewelry or gold coins. Manappuram charges 12% per year interest rate on gold loan means 1% per month. One thing to consider is gold loan interest rate is depend on how much loan you take on your jewelery

like if you take Rs 18000 loan on 10 gram gold then interest is 16% and if you take Rs10000 on 10 gram then interest rate is 12%.It means if you take low loan on same jewlery then interest rate is low and if you want high amount loan then interest rate is high. Manappuram gives maximum Rs. 2,100 per gram of Gold and it takes generally 15-20 minutes for loan approval. To get loan manappuram just ask for Voter ID or Ration Card or Driving License, if you any one of these then they process your loan application also there are no loan processing fee like other private banks charge 0.50% of loan amount.

4) Star Mahila Gold Loan Scheme by Bank of India : To Resident Indian Women, Working Women For purchase of Gold ornaments, preferably hallmarked, from reputed Jewellers and/or Gold coins of Bank of India. Interest rate is 3% above Base Rate, presently 13.75% p.a., at monthly rests.

5) Indian Overseas Bank Gold Loan: The bank offers commercial cash credit against jewellery. This loan offers finance for business activities in the form of cash credit or overdraft against the value of jewels. Indian Overseas Bank Gold Loan Review states that it is an attractive loan which customers are willing to take as the Indian Overseas Bank Gold Loan Interest Rate is attractive and the Indian Overseas Bank Gold Loan Eligibility is easy to achieve. Indian Overseas Bank Gold Loan Interest Rate for loan up to 3 lakhs is 12%. Indian Overseas Bank Gold Loan Rate for an amount above 3 lakhs is 12.50%. Indian Overseas Bank Gold Loan Rate are subject to change.