On A Golden Streak

For large gold loan NBFCs, Business model revamp paves the path out oF a slump.

- Krishnan Sitaraman

Profitability of large gold loan non-banking finance companies (NBFCs) rebounded to peak levels seen before the regulatory tightening began in 2012 and eroded returns. FY2016/17 saw their return on assets zoom to over 4 per cent from around 2.5 per cent in FY2013/14.

The improvement started as large NBFCs made two changes to their business model in early 2014. One, they started a periodic collection of interest and second, they lowered product tenure.

Earlier, gold loans had a one-year tenure with a bullet repayment that included interest. Borrowers had the option to repay any time, and over 80 per cent of them did so within six months. However, in the past couple of years, forced by a decline in gold prices, lenders started to collect interest from borrowers at periodic intervals. It was reflected in balance sheets, and interest receivables fell to 3-4 per cent of assets under management (AUM) as on March 31, 2017, compared with the previous 6 per cent or so.