8/9/2019 Runaway Gold Prices Mean More Business for Financiers

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Runaway gold prices mean more business forfinanciersSudeep Jain / Mumbai June 29, 2010, 0:00 IST

Prospective buyers might grumble about skyrocketing gold prices, but the recent run-upin bullion has one group of unexpected beneficiaries companies who lend againstgold. Since they use gold as collateral for loans, any increase in the yellow metalsvalue means they can disburse larger sums against the same amount of gold.

Manappuram Finance, specialising in loans against gold, is reaping benefits. Over thepast three months, we have increased our loan book by 20 per cent. Of this, four to fiveper cent would have been due to the increase in gold prices and the rest due to ourincreased branch presence, said I Unnikrishnan, managing director. Customers aretaking full benefit of the increase in gold prices. The company has a loan book of about

Rs 3,000 crore.

Risk cover pull

Global gold prices have risen more than 15 per cent this year, with rising concerns oversovereign debt levels in Europe and prospects of more financial market instabilityboosting interest in the precious metal as a haven from risk.

In India, gold prices have increased by Rs 1,995 per 10 gm since the beginning ofMarch to Rs 18,830 per 10 gm as of June 26. Gold financing is unique to the country.India is one of the largest gold markets, with an annual demand of 700 tonnes. Theorganised gold loan market in India is estimated at Rs 22,000-27,000 crore, with a

compounded annual growth rate of 38 per cent during 2002-09, according to an IMACSreport.

Most lenders allow borrowers to decide how much they want to borrow against a fixedamount of gold and fix the rate accordingly. The interest rate is 12-18 per cent. Sincethey are secured, loans against gold tend to be cheaper than personal loans and areusually taken for shorter periods.

The entrants in the segment are also enthused by the increase. Andhra Bank, whichintroduced the product last year, is considering increasing the rate per gram, accordingto a senior executive. This rate is the sum borrowers are entitled to get for each gram of

gold they pledge.

However, companies are wary of volatility in gold prices, since a sharp correction willerode the value of their collateral.

To guard against short-term volatility, some, such as Manppuram Finance, have startedusing the 90-day average price while valuing gold, rather than the daily price.

8/9/2019 Runaway Gold Prices Mean More Business for Financiers

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Earlier, we used the daily export price but now we have moved to the 90-day averageprice. This also serves us, because the average tenure of our loans is three to fourmonths, said Manappurams Unnikrishnan.