India gold loans market turns competitive

The gold loans market in India is set to witness more competition as more financial institutions and banks enter the lucrative business and safer business of lending funds with physical gold as collateral.
Kerala-based Federal Bank has announced plans to widen its network of exclusive gold loan branches in various parts of the country. It already has 60 branches in Tamilnadu and Karnataka, the first one was opened this year in January. The number of gold loan branches will rise to 80 very soon and 350 by the end of the year, Shyam Srinivasan, Managing Director and CEO of Federal Bank told a leading local daily. The gold loan business s of the bank is being promoted under its Federal Bank Financial Services Division (FEDFINA).
Public sector banks have now started offering competitive rates for gold loans for agricultural purposes with Canara Bank offering loans for a low rate of 5% per annum while other major banks are offering from 6-8 per cent interest rate per annum. New generation banks such as HDFC Bank and ICICI Bank have also come in the forefront promoting gold loans for the common man.
Bankers say the default rate is much lower for gold loans because Indians do not want to risk losing their family jewelry. And unlike traditional personal loan, no credit checks are needed for gold loans.
According to estimates, the organized gold loan market in India stands at Rs 350-400 billion and has grown at an compound annual growth rate of 40% during 2002-2010 and is expected to grow at an annual rate of 35-40% over the next three years.
Meanwhile, Muthoot Finance Ltd, India’s largest gold financing company whose Initial Public Offering (IPO) was heavily oversubscribed and subsequently listed in Bombay Stock Exchange (BSE) this month has announced plans to take gold loan business abroad.
The company is planning to set up about three or four branches at UK this year to target the large Asian immigrant population in the region for its gold loans business. The group already has a presence at England, through Muthoot Global Money Transfer, which provides cash transfer and remittance services to countries like Sri Lanka, Pakistan and Bangladesh apart from India.
With an established br¬anch network, presence of the large Asian immigrant population and the popularity of gold as an investment class in the community will be an advantage for the company as it tries to expand its gold loans business outside the Indian market, Muthoot officials said.
Muthoot Finance Ltd, registered a growth of 117 % in its net profit to Rs. 494 crore for the financial year ended March 31, 2011, as compared to Rs. 227 crore of the previous fiscal. The gold loans outstanding till March 31, 2011 is 15728 cr which is 114% higher than corresponding period in 2010. Total gold pledged with Muthoot Finance Ltd has risen 72% in FY 2011 to 112 tonnes.
In a recent development, Cholamandalam, Investment and Finance Company Ltd (CIFCL), part of the Murugappa group ,has decided to enter the lucrative gold loans market and will initially target Andhra Pradesh, Tamilnadu and Kerala which together account for over 40% of the Indian gold loans market. It would focus on the Rs 30,000-50,000 income bracket, and would lend up to 75-80 per cent of the value, company officials said.

SBI focuses on investor confidence after Q4 earnings

State Bank of India (SBI) will mitigate risk on its agriculture portfolio by buying insurance cover for all crop loans.
The nation’s largest lender, which had almost doubled bad assets in farm loans in fiscal 2011, will link the crop loans to crop insurance.
“Delinquencies will be in crop failure. In that case, crop insurance will take care of the losses,” chairman Pratip Chaudhuri said in an interview with Bloomberg UTV for Banker’s Trust programme.
The bank will also call an analyst meet in a week for a “threadbare discussion” on its dismal fourth quarter earning—a sort of soul searching exercise on what went wrong and why.
It had provided for bad loans, home loans and employees’ pension; as a result, SBI posted a Rs.21 crore profit in its fourth quarter against analysts’ expectation of Rs.3,000 crore.
The stock tanked 17% at a stretch, wiping out more than Rs.28,000 crore of investors’ worth—between 17 May, the day result was declared, and 26 May—before recovering marginally. On Monday, SBI stock rose 0.07% to close at Rs.2,236.
The proposed meeting with analysts, Chaudhuri expects, will restore confidence of the investor community, and reassure them that the weak fourth quarter earning was a one-off phenomenon.
The share of bad debts accruing from agriculture was Rs.4,524 crore, or 18% of the total non-performing assets (NPAs), or bad debts, in fiscal 2011.
The total farm loan portfolio of SBI rose 21.18% to Rs.94,826 crore in fiscal 2011 out of which 6.37% has turned bad. This is sharply up from last year’s 3.66%.
“We did not expect this,” said Chaudhuri.
“NPA in agriculture is a problem area for SBI. If they link their agri-portfolio to crop insurance and get money for crop failure related delinquencies, it solves SBI’s problem to a great extent; but it all depends on what kind of premium they will have to pay,” said Hatim Broachwala, analyst with Mumbai-based domestic brokerage Fortune Financials.
The bank has also drawn down close to Rs.8,000 crore from its reserves to set aside money to pay employee pensions.
Chaudhuri defended the move to erode its core capital.
“It is not by choice that we dipped into the reserves,” he said, adding that the bank’s operating profit was not enough to set aside the provision from. If the bank would have done that, it could have “distorted all important ratios,” Chaudhuri said.
According to the chairman, SBI is readying for an introspection of its key segments and business parameters in a bid to deal with a few critical issues such as an unprecedented rise in its NPAs, especially from farm sector, and a fall in its NIM (net interest margin) in the fourth quarter.
Sequentially, the NIM, a key parameter of profitability, fell close to 0.50% to 3.07%.
The analysts’ meet assumes importance because SBI is readying to raise capital through a Rs.20,000 crore rights issue.
Chaudhuri said being the “flagship bank” of the government, the nod for the issue will not be a problem for the bank to secure, especially when the government has given such a nod to all the other banks.
“For the government, SBI has a special place,” Chaudhuri said confidently.
Since fiscal 2009, in the wake of the global meltdown, SBI has restructured assets worth Rs.34,349 crore, close to 15% of which has turned bad so far.
Some analysts expect bad debts to rise as much as 30%.
However, the SBI chief said he is confident that recovery will not be hampered. “Restructured loans are backed by securities. The companies are cash-poor but asset-rich. Where the underlying assets are healthy, we don’t expect any deterioration in asset quality.”
“Besides, they (the restructured firms) are not fly-by-night operators,” Chaudhuri said.
Chaudhuri wants the bank’s credit growth to moderate between 16% and 17%, from 18-20% earlier, and deposits to grow at 21%.
“Our CD (credit-deposit) ratio is already at 76%. This will lend some semblance of balance,” Chaudhuri said.
The banking regulator had earlier criticized banks for high CD ratios as that makes asset liability management a challenge and may turn into a systemic risk.

Credit card operations of SBI show good results

State Bank of India has seen an improvement in performance of its credit card segment in the fiscal last ended.
After long years of losses, the credit card segment of the bank has finally borne profits and that too at a time when results have been coming negative from all segments of the bank.
The credit card business booked profits worth Rs 7.10 crore in the last fiscal as against losses of Rs 153 crore in the fiscal prior to that.
Customer card spends has increased by 30% to Rs 6452 crore, the bank said.
SBI card currently has 2.3 million cards.