Tuesday, September 29, 2009

NYT: Out from India's Alleys, Gold Loans Gain Respect

Interesting article in the New York Times, intersects two interesting subjects - gold and India. We can file this one under "what is old is new again" - gold standard anyone?
  • Indians own more gold than the citizens of any other country. They use the glittering metal as ornaments to flaunt family wealth, as a source of retirement savings and as insurance against calamities.
  • But lately, gold has become something else: collateral, and the basis of one of the country’s fastest-growing businesses, gold loans. While pawning the family jewels would be a sign of distress in the West, trading gold for cash increasingly is viewed in India as the equivalent of taking out a home equity loan to expand a business or simply to buy things. “This is the rural credit card,” said V. P. Nandakumar, chairman of the Manappuram Group, one of the country’s biggest gold loan companies. “This is the only way really that someone gets an instant loan within three minutes.”
  • But loans against gold are also a measure of how immature — and restricted — India’s credit markets are. Most Indians, especially those working in the informal economy, which accounts for 92 percent of the country’s 400 million workers, have few choices when they need to borrow money: they lack other collateral or have no documents to prove their incomes.
  • It is now “a lot more palatable for banks to give loans against gold jewelry,” said Viren H. Mehta, a national director at Ernst & Young India.
  • Pawnbrokers and money lenders have long operated in India’s back alleys, making loans against jewelry to families in distress, at interest rates of 30 percent or more. But gold loans made by banks and finance companies are different. Rates are lower — 14 to 30 percent — and their businesses are regulated.
  • There are no publicly available aggregate data about gold loans, but finance companies that specialize in them are growing fast. Manappuram, a pioneer in the business, made $730 million in gold loans last year — up from $397 million a year earlier. Muthoot Finance, a privately held firm, says its lending is growing at 60 percent a year.
  • By contrast, total outstanding bank loans to the private sector increased 16 percent last year, year over year, and have been essentially flat so far this year.
  • Though the financial system here has become more inclusive, it still doesn’t reach many people. More Indians, for instance, own gold than own stocks or mutual funds.
  • Even though gold loans have become more popular, many are still embarrassed about using them. Many customers still view gold loans “as a desperate loan, a loan of the last resort,” said George Alexander Muthoot, the managing director of the Muthoot Group. “We’ve been trying to change that perception into a smart loan product.”
  • Mr. Muthoot and his rivals are confident that they have just begun to mine the market. He estimates that just 600 tons of the 15,000 tons of gold Indians own has been borrowed against so far. “There is another 14,000 tons of gold waiting to be tapped,” he said. “It’s just lying there.”
So of course you are wondering about default, since the closest thing to this in America are pawn shops where defaults are relatively high. Not so much in India thus far. (need that gold for the dowry) ;)
  • Gold loans, so far at least, have very low defaults — companies say fewer than 1 percent of borrowers fail to repay. Most jewelry is reclaimed in less than four months.
  • When borrowers don’t repay, their gold can be easily sold for more than the value of the loan. Still, the lenders do have some risk: for instance, the price of gold, which recently surged past $1,000 a troy ounce, could fall more sharply than some lenders are prepared for.
Anecdotal example of how it works:
  • ... for borrowers like Vishwanathan C. R. Pai, a rickshaw repairman, gold loans are an essential financial tool. He frequently hands over his family’s jewelry at Muthoot Finance to pay operating expenses for his business. He often borrows 10,000 to 25,000 rupees ($200 to $500) to buy spare parts, repaying the loans when customers pay him.
  • He pays 15 to 18 percent interest.
  • Mr. Pai said he couldn’t get a business loan from banks because they wanted documentation of his income. But his customers, who earn as little as $100 a month, don’t do checks and invoices. “It is very easy here, there are no formalities,” Mr. Pai, 29, said about borrowing at Muthoot.
  • Mr. Pai laughed when asked what would happen if he couldn’t reclaim the necklace he had recently pledged. “I have to get it back,” he said, “otherwise my wife won’t let me back in the house.”

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