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.