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A PROJECT ON NBFC DETAILS ON LOAN AGAINST GOLD AND

MUTHOOT FINANCE

Submitted to: - Submitted By:- Business School of Delhi chayan anand 28/1, Knowledge Park III Roll no, 100241036Greater Noida-201306

Acknowledgement

One of the most pleasant aspects of writing an acknowledgement is the opportunity to thank all those who have contributed to it. Unfortunately, the list of expression of gratitude- no matter how extensive – is always incomplete and inadequate. This acknowledgement is no exception. First and foremost I’d like to thanks my advisor, Professor Mr. Vijay Anand Dubey, Mr. Puneet Kumar, Mr. Prof Rajesh. Mr. Yogendra., Mr. Athar Ali. for all the stimulating advices and consistently strong support. It has been great pleasure of mine to work with and learn from these extraordinary individuals. I wish to express my sincere gratitude to my industry guide Mrs Rupal thackkar– Director, muthoot finance gandhidham. I owe my deepest thanks to my family- my mother and father who have always stood by me and guided me through my career, and have pulled me through against impossible odds at times.

It is impossible to remember all, and I apologize to those I have inadvertently left out. Lastly, thank you all and thank God!

RegardsShatrughan kumar Singh.

Declaration

I am SHATRUGHAN KUMAR SINGH hereby state that this final evaluation report has been submitted to Sunshine Education in partial fulfillment of the requirements of final project in PGDM program of 2009-11. The empirical information of this report is based on my experience in company. Any part of this project has not been reported or copied from any report and others.

SHATRUGHAN KUMAR SINGH

Table of content

1.Introduction2.Historical background of NBFC3.Factors contributing to the growth of NBFC4.Classification of NBFC5.Role of NBFC6.Function of NBFC

MUTHOOT FINANCE1.Introduction2.Overview3.Board of Directors4.How does Gold loan benefit5.The debt trap faced by Middle-Class & Poors6.Advantage of Gold Loan7.Rise of gold loan market8.Process of obtaining gold loan

9.Gold loan market: Spectacular growth10.Muthoot Finance- Quick stats11.What is the process to be followed to obtain a Gold Loan12.Gold loan become better option than Personal Loan13.Are Gold Loan safe?14.Do’s and Dont’s.

INTRODUCTION:

We studied about banks, apart from banks the Indian Financial System has a large number of privately owned, decentralised and small sized financial institutions known as Non-banking financial companies. In recent times, the non-financial companies (NBFCs) have contributed to the Indian economic growth by providing deposit facilities and specialized credit to certain segments of the society such as unorganized sector and small borrowers. In the Indian Financial System, the NBFCs play a very important role in converting services and provide credit to the unorganized sector and small borrowers.

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund companies etc. NBFCs can be classified into deposit accepting companies and non-deposit accepting companies. NBFCs are small in size and are owned privately. The NBFCs have grown rapidly since 1990. They offer

attractive rate of return. They are fund based as well as service oriented companies. Their main companies are banks and financial institutions. According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of India.

The NBFCs in advanced countries have grown significantly and are now coming up in a very large way in developing countries like Brazil, India, and Malaysia etc. The non-banking companies when compared with commercial and co-operative banks are a heterogeneous (varied) group of finance companies. NBFCs are heterogeneous group of finance companies means all NBFCs provide different types of financial services.

Non-Banking Financial Companies constitute an important segment of the financial system. NBFCs are the intermediaries engaged in the business of accepting deposits and delivering credit. They play very crucial role in channelizing the scare financial resources to capital formation.

NBFCs supplement the role of the banking sector in meeting the increasing financial need of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs have more flexible structure than banks. As compared to banks, they can take quick decisions, assume greater risks and tailor-make their services and charge according to the needs of the clients. Their flexible structure helps in broadening the

market by providing the saver and investor a bundle of services on a competitive basis.

Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of the organized financial system in India. The Financial System of any country consists of financial Markets, financial intermediation and financial instruments or financial products. All these Items facilitate transfer of funds and are not always mutually exclusive. Inter-relationships Between these are parts of the system e.g. Financial Institutions operate in financial markets and are, therefore, a part of such markets.

NBFCs at present providing financial services partly fee based and partly fund based. Their fee based services include portfolio management, issue management, loan syndication, merger and acquisition, credit rating etc. their asset based activities include venture capital financing, housing finance, equipment leasing, hire purchase financing factoring etc. In short they are now providing variety of services. NBFCs differ widely in their ownership: Some are subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd, Muthq oot Bankers Muthoot Financial Services Ltd a key player in Kerala financial services. Other financial institutions are IFCIs IFCI Financial Services Ltd or IFCI

Custodial Services Ltd .Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions.

The term “Finance” is often understood as being equivalent to “money”. However, final exactly is not money; it is the source of providing funds for a particular activity. The word system, in the term financial system, implies a set of complex and closely connected or inter-linked Institutions, agents, practices, markets, transactions, claims, and liabilities in the Economy. The financial system is concerned about money, credit and finance. The three terms are intimately related yet are somewhat different from each other:

Money refers to the current medium of exchange or means of payment. Credit or loans is a sum of money to be returned, normally

with interest; it refers to a debt Finance is monetary resources comprising debt and

ownership funds of the state, company or person.

HISTORICAL BACKGROUND.

The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by the Reserve Bank Amendment Act, 1963 to include provisions relating to non-banking institutions receiving deposits and financial institutions. It was observed that the existing legislative and regulatory framework required further refinement and improvement because of the rising number of defaulting NBFCs and the need for an efficient and quick system for Redressal of grievances of individual depositors. Given the need for continued existence and growth of NBFCs, the need to develop a framework of prudential legislations and a supervisory system was felt especiallyto encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to review the existing framework and address these shortcomings, various committees were formed and reports were submitted by them. Some of the committees and its recommendations are given hereunder:

1. James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974. After studying the various money circulation schemes which were floated in the country during that time and taking into consideration the impact of such schemes on the economy, the Committee after extensive research and analysis

had suggested for a ban on Prize chit and other schemes which were causing a great loss to the economy. Based on these suggestions, the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 was enacted

2.Dr.A.C.Shah Committee (1992):

The Working Group on Financial Companies constituted in April 1992 i.e. the Shah Committee set out the agenda for reforms in the NBFC sector. This committee made wide ranging recommendations covering, inter-alia entry point norms, compulsory registration of large sized NBFCs, prescription of prudential norms for NBFCs on the lines of banks, stipulation of credit rating for acceptance of public deposits and more statutory powers to Reserve Bank for better regulation of NBFCs.

3.Khan Committee (1995)

This Group was set up with the objective of designing a comprehensive and effective supervisory framework for the non-banking companies segment of the financial system. The important recommendations of this committee are as follows:i. Introduction of a supervisory rating system for the

registered NBFCs. The ratings assigned to NBFCs would primarily be the tool for triggering on-site inspections at various intervals.

ii. Supervisory attention and focus of the Reserve Bank to be directed in a comprehensive manner only to those NBFCs having net owned funds of Rs.100 laths and above.

iii. Supervision over unregistered NBFCs to be exercised through the off-site surveillance mechanism and their on-site inspection to be conducted selectively as deemed necessary depending on circumstances.

iv. Need to devise a suitable system for co-coordinating the on-site inspection of the NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they were subjected to one-shot examination by different regulatory authorities.

v. Some of the non-banking non-financial companies like industrial/manufacturing units were also undertaking financial activities including acceptance of deposits, investment operations, leasing etc to a great extent. The committee stressed the need for identifying an appropriate authority to regulate the activities of these companies, including plantation and animal husbandry companies not falling under the regulatory control of Either Department of Company Affairs or the Reserve Bank, as far as their mobilization of public deposit was concerned.

vi. Introduction of a system whereby the names of the NBFCs which had not complied with the regulatory framework /

directions of the Bank or had failed to submit the prescribed returns consecutively for two years could be published in regional newspapers.

4. Narasimhan Committee (1991)

This committee was formed to examine all aspects relating to the structure, organization & functioning of the financial system.

These were the committee’s which founded non- banking financial companies.

NON-BANKING FINANCIAL COMPANY (NBFC)

-MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context of Indian Economy. They are indispensible part in the Indian financial system because they supplement the activities of banks in terms of deposit mobilization and lending. They play a very important role by providing finance to activities which are not served by the organized banking sector. So, most the committees, appointed to investigate into the activities, have recognized their role and have recognized the need for a well-established and healthy non-banking financial sector.

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

Non-banking institution which is a company and which has its principal business of receiving deposits under any scheme of arrangement or any other manner, or lending in any manner is also a non- banking financial company.

DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as:

(i) A non-banking institution, which is a company and which has its principal business the receiving of deposits under any scheme or lending in any manner.

(ii) Such other non-banking institutions, as the bank may with the previous approval of the central government and by notification in the official gazette, specify.

NBFCS provide a range of services such as hire purchase finance, equipment lease finance, loans, and investments. NBFCS have raised large amount of resources through deposits from public, shareholders, directors, and other companies and borrowing by issue of non-convertible debentures, and so on.

Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions:

UNIT TRUST OF INDIA. LIFE INSURANCE CORPORATION (LIC). GENERAL INSURANCE CORPORATION (GIC).

Factors contributing to the Growth of NBFCs:

According to A.C. Shah Committee, a number of factors have contributed to the growth of NBFCs. Comprehensive regulation of the banking system and absence or relatively lower degree of regulation over NBFCs has been one of the main reasons for

their growth. During recent years regulation over their activities has been strengthened, as see a little later.

The merit of non-banking finance companies lies in the higher level of their customer orientation. They involve lesser pre or post-sanction requirements, their services are marked with simplicity and speed and they provide tailor-made services to their clients. NBFCs cater to the needs of those borrowers who remain outside the purview of the commercial banks as a result of the monetary and credit policy of RBI. In addition, marginally higher rates of interest on deposits offered by NBFCs also attract a large number of depositors

Regulation of NBFCs

In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing directions to the maximum amount of deposits, the period of deposits and rate of interest they could offer on the deposits accepted. Norms were laid down regarding maintenance of certain percentage of liquid assets, creation of reserve funds, and transfer thereto every year a certain percentage of profit, and so on. These directions and norms were revised and amended from time to time.

In 1997, the RBI Act was amended and the Reserve Bank was given comprehensive powers to regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a certificate of registration and have minimum net owned funds. Ceilings were prescribed for acceptance of deposits, capital adequacy, credit

rating and net-owned funds. T he Reserve Bank also developed a comprehensive system to supervise NBFCs accepting/ holding public deposits. Directions were also issued to the statutory auditors to report non-compliance with the RBI Act and regulations to the RBI, Board of Directors and shareholders of the NBFCs.

CLASSIFICATION OF NBFCs:

This classification is in addition to the present classification of NBFCs into deposit-taking and Non-deposit-taking NBFCs. Depending on the nature their major activity, the non-banking financial companies can be classified into the following categories, they are:

(1) Equipment leasing companies.(2) Hire-purchase finance companies.(3) Housing finance-companies.(4) Investments companies.(5) Loan companies.(6) Mutual Fund Benefit Companies.(7) Chit fund companies.(8) Residuary companies.

Equipment Leasing Company:

(a) Equipment leasing company means any company which is carrying on the activity of leasing of equipment, as its main business, or the financing of such activity.

(b) The leasing business takes place of a contract between the lessor (lessor means the leasing company) and the lessee (lessee means a borrower).

(c) Under leasing of equipment business a lessee is allowed to use particular capital equipment, as a hire, against a payments of a monthly rent.

(d) Hence, the lessee does not purchase the capital equipment, but he buys the right to use it.

(e) There are two types of leasing arrangements, they are:(i) Operating leasing: In operating leasing the producer of

capital equipment offers his product directly to the lessee on a monthly rent basis. There is no middleman in operating leasing.

(ii) Finance leasing: In finance leasing, the producer of the capital equipment sells the equipment to the leasing company, then the leasing company leases it to the final user of the equipment. Hence, there are three parties in finance leasing. The leasing company acts as a middleman between the producer of equipment and the user of equipment.

Benefits/Advantages of Leasing:

(1) 100% finance:They borrower in the equipment can get up to 100% finance for the use of capital through leasing arrangement in the sense, that the leasing company provides the equipment immediately and the borrower need not pay the full amount at once. Hence, the borrower can use the amount for fulfilling other needs such as expansion development, etc.

(2) Payment is easier:Leasing finance is costlier. However, the borrower finds it convenient (easy) as he has to pay in installments out of the return from the investment in the equipment. Hence, the borrower does not feel the burden of payment.

(3) Tax concessions:The borrower can get tax concessions in case of leasing equipments. The total amounts of rent paid on leased equipment are deducted from the gross income. In case of immediate purchase, interest on the loan and the depreciation are deducted from the taxable income.

Hire-purchase Finance Companies:

(a) Hire purchase finance company means any company which is carrying on the main business of financing, physical assets through the system of hire-purchase.

(b) In hire-purchase, the owner of the goods hires them to

another party for a certain period and for a payment of certain installment until the other party owns it.

(c) The main feature of hire-purchase is that the ownership of the goods remains with the owner until the last installment is paid to him. The ownership of goods passes to the user only after he pays the last installment of goods.

(d) Hire-purchase is needed by farmers, professionals and transport group people to buy equipment on the basis of hire purchase.

(e) It is a less risky business because the goods purchased on hire purchase basis serve as securities till the installment on the loan is paid.

(f) Generally, automobile industry needs lot hire-purchase finance.

(g) The problem of recovery of loans does not occur in most cases, as the borrower is able to pay back the loan out of future earnings through the regular generation of funds out of the asset purchased.

(h) In India, there are many individuals and partnership firms doing this business. Even commercial banks, hire-purchase companies and state financial corporations provide hire-purchase credit.

Housing Finance Companies :

(a) A housing finance company means any company which is carrying on its main business of financing the construction

or acquisition of houses or development of land for housing purposes.

(b) Housing finance companies also accept the deposits and lend money only for housing purposes.

(c) Even though there is a heavy demand for housing finance, these companies have not made much progress and as on 31st March, 1990 only 17 such companies here reported to the RBI.

(d) The ICICI and the Canara Bank took the lead to sponsor housing finance companies, namely, Housing Development Corporation Ltd. and the Canfin Homes Ltd.

(e) All the information about the Housing finance companies is available with the National Housing Bank. Housing finance companies also have to compulsorily to register themselves with the Reserve Bank of India.

(f) National Housing bank is the apex institution in the field of housing. It promotes housing finance institutions, both on regional and local levels.

Investment Companies: (a) Investment company means any company which is carrying

on the main business of securities.(b) Investment companies in India can be broadly classified

into two types:

(1) Holding Companies:(i) In case of large industrial groups, there are holding

companies which buy shares mainly for the purpose of taking control over another institution.

(ii)They normally purchase the shares of the institution with the aim of controlling it rather than purchasing shares of different companies.

(iii) Such companies are set up as private limited companies.

(2) Other Investment Companies:(i) Investment companies are also known as Investment

trusts.(ii)Investment companies collect the deposits from the public

and invest them in securities.(iii) The main aim of investment companies is to protect

small investors by collecting their small savings and investing than in different securities so that the risk can be spread.

(iv) An individual investor cannot do all this on his own, due to lack of expertise in investing. Hence, investing companies are formed for collective investing. Companies are formed for collective investments of money, mainly of small investors.

(v)Another benefit of an investment company is that it offers trained, experienced and specialised management of

funds.(vi) It helps the investors to select a financially sound and

liquid security. Liquid security means a security which can be easily converted into cash.

(vii)In India investment trusts are very popular. They help in putting the savings of people into productive investments.

(viii)Some of the investment trusts also do underwriting, promoting and holding company business besides financing.

(ix)These investments trusts help in the survival of business in the economy by keeping the capital market alive, active and busy.

Loan company:

(a) A loan company means any company whose main business is to provide finance through loans and advances.

(b) It does not include a hire purchase finance company or an equipment leasing company or a housing finance company.

(c) Loan company is also known as a “Finance Company".(d) Loan companies have very little capital, so they depend

upon public deposits as their main source of funds. Hence, they attract deposits by offering high rates of interest.

(e) Normally, the loan companies provide loans to wholesalers, retailers, small-scale industries, self-employed people, etc.

(f) Most of their loans are given without any security. Hence, they are risky.

(g) Due to this reason, the loan company charges high rate of interest on its loans. Loans are generally given for short period of time but they can be renewed.

Mutual Benefit Financial Company:

(a) They are the oldest form of non-banking financial companies.

(b) A mutual benefit financial company means any company which is notified under section 620A of the Companies Act, 1956.

(c) It is popularly known as "Nidhis".(d) Usually, it is registered with only very small number of

shares. The value of the shares is often Rs. 1 only(e) It accepts deposits from its members and lends only to its

members against tangible securities. Chit-fund Companies: History:

The chit fund schemes have a long history in the southern states of India. Rural unorganized chit funds may still be spotted in many southern villages. However, organized chit fund companies are now prevalent all over India. The word is Hindi and refers to a small note or piece of something. The word

passed into the British colonial “lexicon” and is still used to refer to a small piece of paper, a child or small girl

How Chit Fund Help?

Chit Funds have the advantage both for serving a need and as an investment. Money can be readily drawn in an emergency or could be continued as an investment.Interest rate is determined by the subscribers themselves, based on mutual decisions and varies from auction to auction.The money that you borrow is against your own future contributions.The amount is given on personal sureties too; unlike in banks and other financial institutions which demand a tangible security.Chit funds can be relied upon to satisfy personal needs. Unlike other financial institutions, you can draw upon your chit fund for any purpose - marriages, religious functions, medical expenses, just anything...Cost of intermediation is the lowest.

(a) Chit funds companies are one of the oldest forms of local non-banking financial institution in India.

(b) They are also known as "kuries".(c) These institutions have originated from south India and are

very popular over there.

(d) A chit fund organisation is an organisation of a number of people who join together and subscribe (contribute) amounts monthly so that any members who is in need of funds can draw the amount less expenses for conducting the chit. It is an organisation run on co-operative basis for the benefit of the members who contribute money, the funds are used by them as and when a particular member needs it.

(e) It helps the persons who save money regularly to invest their savings with good chances of profit.

(f) Chit funds have many defects as the rate of return given to each member is not the same.

(g) It differs from person to person, this leads in improper distribution of gains and losses.

(h) Also, the promoters of these funds do everything for their own benefit to get maximum income.

(I) Hence, the banking commission has made suggestions to pass uniform chit funds laws for the whole of India.

Residuary Non-banking Companies:

(a) The term "residue" means a small part of something that remains. As the meaning of the term shows, a residuary company is one which does not fall in any of the above categories.

(b) It generally accepts deposits by operating different schemes similar to recurring deposit schemes of banks.

(c) Deposits are collected from a large number of people by promising them that their money would be invested in banks and government securities

(d) The collection of deposits is done at the doorsteps of depositors through bank staff, who is paid commission.

(e) These companies get the funds at low cost for longer terms, at they invest them in investments which generates good amount of return.

(f) Many of these companies operate with very small amount of capital.

(g) They have some adverse (bad) features, such as:(ii) Some do not submit periodic returns to the regulatory

authority.(iii) Some of them do not appoint banks, etc.

ROLE OF NON- BANKING FINANCIAL COMPANIES.(1) Promoters Utilization of Savings:

Non- Banking Financial Companies play an important role in promoting the utilization of savings among public. NBFC’s are able to reach certain deposit segments such as unorganized sector and small borrowers were commercial bank cannot reach. These companies encourage savings and promote careful

spending of money without much wastage. They offer attractive schemes to suit needs of various sections of the society. They also attract idle money by offering attractive rates of interest. Idle money means the money which public keep aside, but which is not used. It is surplus money.

(2) Provides easy, timely and unusual credit:

NBFC’s provide easy and timely credit to those who need it. The formalities and procedures in case of NBFC’s are also very less. NBFC’s also provides unusual credit means the credit which is not usually provided by banks such as credit for marriage expenses, religious functions, etc. The NBFC’s are open to all. Every one whether rich or poor can use them according to their needs.

(3) Financial Supermarket:

NBFC’s play an important role of a financial supermarket. NBFC’s create a financial supermarket for customers by offering a variety of services. Now, NBFC’s are providing a variety of services such as mutual funds, counseling, merchant banking, etc. apart from their traditional services. Most of the NBFC’s reduce their risks by expanding their range of products and activities.

(4) Investing funds in productive purposes:

NBFC’s invest the small savings in productive purposes. Productive purposes mean they invest the savings of people in businesses which have the ability to earn good amount of returns. For example – In case of leasing companies lease equipment to industrialists, the industrialists can carry on their production with less capital and the leasing company can also earn good amount of profit.

(5) Provide Housing Finance:

NBFC’s, mainly the Housing Finance companies provide housing finance on easy term and conditions. They play an important role in fulfilling the basic human need of housing finance. Housing Finance is generally needed by middle class and lower middle class people. Hence, NBFC’s are blessing for them.

(6) Provide Investment Advice:

NBFC’s, mainly investment companies provide advice relating to wise investment of funds as well as how to spread the risk by investing in different securities. They protect the small investors by investing their funds in different securities. They provide valuable services to investors by choosing the right kind of securities which will help them in gaining maximum rate of returns. Hence, NBFC’s plays an important role by providing sound and wise investment advice.

(7) Increase the Standard of living:

NBFC’s play an important role in increasing the standard of living in India. People with lesser means are not able to take the benefit of various goods which were once considered as luxury but now necessity, such as consumer durables like Television, Refrigerators, Air Conditioners, Kitchen equipments, etc. NBFC’s increase the Standard of living by providing consumer goods on easy installment basis. NBFC’s also facilitate the improvement in transport facilities through hire- purchase finance, etc. Improved and increased transport facilities help in movement of goods from one place to another and availability of goods increase the standard of living of the society.

(8) Accept Deposits in Various Forms:

NBFC’s accept deposits forms convenient to public. Generally, they receive deposits from public by way of depositor a loaner in any form. In turn the NBFC’s issue debentures, units’ certificates, savings certificates, units, etc. to the public.

(9) Promote Economic Growth:

NBFC’s play a very important role in the economic growth of the country. They increase the rate of growth of the financial market and provide a wide variety of investors. They work on the principle of providing a good rate of return on saving, while reducing the risk to the maximum possible extent. Hence, they help in the survival of business in the economy by keeping the capital market active and busy. They also encourage the growth of well- organized business enterprises by investing their funds

in efficient and financially sound business enterprises only. One major benefit of NBFC’s speculative business means investing in risky activities. The investing companies are interested in price stability and hence NBFC’s, have a good influence on the stock- market. NBFC’s play a very positive and active role in the development of our country.

Functions of Non- Banking Financial Companies:

(1) Receiving benefits:

The primary function of nbfcs is receive deposits from the public in various ways such as issue of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of nbfcs are made up of money received from public by way of deposit or loan or investment or any other form.

(2) Lending money:

Another important function of nbfcs is lending money to public. Non- banking financial companies provide financial assistance through.

(a)Hire purchase finance :

Hire purchase finance is given by nbfcs to help small important operators, professionals, and middle income

group people to buy the equipment on the basis on Hire purchase. After the last installment of Hire purchase paid by the buyer, the ownership of the equipment passes to the buyer.

(b) Leasing Finance:

In leasing finance, the borrower of the capital equipment is allowed to use it, as a hire, against the payment of a monthly rent. The borrower need not purchase the capital equipment but he buys the right to use it.

(c) Housing Finance:

NBFC’s provide housing finance to the public, they finance for construction of houses, development of plots, land, etc.

(d) Other types of finance provided by NBFCs include:

Consumption finance, finance for religious ceremonies, marriages, social activities, paying off old debts, etc. NBFCs provide easy and timely finance and generally those customers which are not able to get finance by banks approach these companies.

(e) Investment of surplus money:

NBFCs invest their surplus money in various profitable areas.

Commercial Bank versus (v/s) Non-banking Financial Companies

While commercial banks and non-banking financial companies are both financial intermediaries (middleman) receiving deposits from public and lending them. Commercial bank is called as “Big brother” while the “NBFC” is called as the “Small brother. But there are some important differences between both of them, they are as follows:

No. Commercial Banks. Non Bank Financial companies.

1 Issue of cheques:In case of commercial banks, a cheque can be issued against bank deposits.

In case of NBFC’s there is no facility to issue cheques against bank deposits.

2 Rate of interest:Commercial bank offer lesser rate of interest on deposits

NBFC’s offer higher rate of interest on deposits and

and charge less rate of interest on loans as compared to NBFC’s.

charge higher rate of interest on loans as compared to Commercial banks.

3 Facilities provided by them:Commercial banks can enjoy the benefit of certain facilities like deposit insurance cover facilities, refinancing facilities, etc.

NBFC’s are not given such facilities.

4 Law which governs them:

Commercial banks are regulated by Banking Regulation Act 1949 and RBI.

NBFC’s are regulated by different regulation such as SEBI, Companies Act, National Housing Bank, Unit Fund Act and RBI.

5 Types of assets:

commercial banks hold a variety of assets in the form of loans, cash credit, bill of exchange, overdraft etc.

NBFC’s specialize in one types of asset. For e.g.: Hire purchase companies specialize in consumer loans while Housing Finance Companies specialize in housing finance only.

About Us

We are the largest gold financing company in India in terms of loan portfolio. (Source: IMaCS Industry Report (2010 Update). We provide personal and business loans secured by gold jewellery, or Gold Loans. We are a “Systemically Important Non-deposit taking NBFC” headquartered in the southern Indian state of Kerala. Our promoters are Mr.M.G.George Muthoot , Mr.George Thomas Muthoot , Mr. George Jacob Muthoot and Mr.George Alexander Muthoot. Our operating history has evolved over a period of 70 years since M George Muthoot (the father of our Promoters) founded a gold loan business in 1939 under the heritage of a trading business established by his father, Ninan Mathai Muthoot, in 1887. As of March 31, 2010 our branch network was the largest among gold loan NBFCs in India(Source: IMaCS Industry Report (2010 Update). Our branch network as of August 31, 2010 was 1,921 branchesThe Muthoot Group is an 123-year-old business house based in India.It has interestsin Financial Services, InformationTechnology,Media, Healthcare, Education, Powergeneration, Infrastructure, Plantations, Precious Metals and Hospitality. The Muthoot Group operates in 21 states in India, and has a customer base of over 25 million. It is wholly owned and managed by the Muthoot Family.The Group takes its name from the Muthoot Family based in Kerala. The Company was set up by Muthoot Ninan Mathai in 1887 at Kozhencherry, a small town in the erstwhile Kingdom of Travancore (Kerala). It was then later taken over by his son M George Muthoot who incorporated the Finance division of the group which was till then primarily involved in wholesale of

grains. The company is now managed by the third and fourth generation of its family members.

OverviewWe are the largest gold financing company in India in terms of loan portfolio. (Source: IMaCS Industry Report (2010 Update). We provide personal and business loans secured by gold jewellery, or Gold Loans. We are a “Systemically Important Non-deposit taking NBFC” headquartered in the southern Indian state of Kerala. Our promoters are Mr.M.G.George Muthoot , Mr.George Thomas Muthoot , Mr. George Jacob Muthoot and Mr.George Alexander Muthoot. Our operating history has evolved over a period of 70 years since M George Muthoot (the father of our Promoters) founded a gold loan business in 1939 under the heritage of a trading business established by his father, Ninan Mathai Muthoot, in 1887. As of March 31, 2010 our branch network was the largest among gold loan NBFCs in India(Source: IMaCS Industry Report (2010 Update). Our branch network as of August 31, 2010 was 1,921 branches.

Type Private Conglomerate

Industry FinanceHotels & ResortsInformation technologyBroadcast MediaHealthcareEducationEnergy & Power GenerationInfrastructure

Founded 1887 by Muthoot Ninan Mathai

Headquarters

Kochi, India

Key people

M G George Muthoot (Chairman)George Alexander Muthoot (MD)George Jacob Muthoot (Whole-Time Director Director)George Thomas Muthoot (Whole-Time Director))

Employees

10,000 (2009)

Website muthootgroup.com

Board of Directors

M.G. George Muthoot, Chairman is a graduate in engineering from Manipal University, and is a businessman by profession. He is the National Executive Committee Member of the Federation of Indian Chamber of Commerce and Industry (“FICCI”) and the current Chairman of FICCI Kerala State Council. He was conferred the Mahatma Gandhi National Award for social service for the year 2001 by the Mahatma Gandhi National Foundation. He is an active member of various social organisations including the Delhi Malayalee Association, Kerala Club, Rotary Club, National Sports Club and has been chosen for several awards by the Rotary International and the Y’s Mens International for community development and social service. He has been the member of the Managing Committee of Malankara Orthodox Syrian Church for over 31 years and is presently the lay trustee of the Malankara Orthodox Syrian Church and a member of the working committee of the Indian Orthodox Church. Recently, he was conferred the HH Baselios Mathew I Award by Catholicate of the Syrian Orthodox Church Mathews the First Foundation for the year 2008 for his services to the Church.

George Thomas Muthoot, Whole Time Director is a businessman by profession. He has over 30 years of experience in managing businesses operating in the field of financial services.George Jacob Muthoot, Whole Time Director has a degree in civil engineering from Manipal University and is a businessman by profession. He is a member of the Trivandrum Management Association, the Confederation of Real Estate Developers Association of India (Trivandrum) and the Trivandrum Agenda Task Force. He is also a member of the Rotary Club, Trivandrum (South), governing body member of the Charitable and Educational Society of Trivandrum Orthodox Diocese, Ulloor, Trivandrum, Finance Committee Member, Mar Diocese College of Pharmacy, Althara, Trivandrum and Mar Gregorious Orthodox Christian Mercy Fellowship, Trivandrum

George Alexander Muthoot, Managing Director is a chartered accountant who qualified with a first rank in Kerala and ranked 20th overall in India, in 1978. He has a bachelor degree in Commerce from Kerala University where he was a rank holder and gold medallist. He was also awarded the Times of India group Business Excellence Award in customised Financial Services in March 2009. He served as the Chairman of the Kerala Non banking Finance Companies Welfare Association from 2004 to 2007 and is currently its Vice Chairman. He is also the Managing Committee Member of the Equipment Leasing Association, Chennai. He is the founder member for The Indus Entrepreneurs International, Kochi Chapter and is now a member of the Core Committee of The Indus Entrepreneurs International Kochi Chapter.Justice K. John Mathew (retired), Independent Director is a graduate in law from the Government Law College, Ernakulam and is a retired judge of the High Court of Kerala. After retirement, he was appointed as a one man commission to investigate into the financial and administrative irregularities in the Aligarh Muslim University. He has served as the Chairman of the Cochin Stock Exchange and was a SEBI nominee director of the Cochin Stock Exchange from 2002 to 2007. He is currently the President of the Peoples Council for Social Justice, Kerala.P. George Varghese, Independent Director is a graduate in mechanical engineering from Kerala University and holds a masters degree in business administration from Cochin University of Science and Technology. He is the managing director of FCI OEN Connectors Limited and FCI Technology Services Limited. He is a trustee of the IMA Blood Bank, Kochi and is a member of the governing council of DC School of Management and Technology. He has served as the vice-president of the Kerala Management Association from 2006 to 2007 and has been on the managing committee of the Indo American Chamber of Commerce from 1992 to 1999. He is also a member of the CII-Kerala.John K Paul, Independent Director is a graduate in engineering from the Regional Engineering College, Kozhikode and a businessman by profession. He is a director of Popular

Automobiles Limited, Popular Vehicles & Services Limited, the first Maruti dealer in Kerala and of Popular Mega Motors (India) Limited., the dealer for TATA Commercial Vehicles. He is trustee of the Kuttukaran Institute for HRD, which is a leading institution offering professional courses. He was the president of the Kerala Chamber of Commerce and Industry from 2005 to2006. He was also the president of both the Kerala Hockey Association from 2005 onwards and the Ernakulam District Hockey Association from 2004 onwards.

FINANCEMuthoot Finance a subsidiary of Muthoot Group was established in 1939, and is primarily involved in the Financial sector of the country. Muthoot Finance falls under the category of Non Banking Financial Company (NBFCs) of the RBI guidelines. The company has more than 2038 branches spread across 23 states of the country and is the largest gold loan company in India.. Muthoot Finance, according to the IMaCS Research & Analytics Industry Reports [Gold Loans Market in India, 2009 (“IMaCS Industry Report 2009”) and the 2010 update to the IMaCS IndustryReport 2009 (“IMaCS Industry Report (2010 Update)”)], is the largest Gold Loan NBFC and has the largest network of branches for a Gold Loan NBFC in India.. Muthoot Finance is also the highest credit rated Gold Loan company in India, with a credit rating of AA- (CRISIL) for its Long Term Debts and P1+ (CRISIL) & A1+ (ICRA)  for its Short Term Debt Instruments.‘Muthoot Gold Power’ is the lifestyle product of Muthoot Finance aimed at mobilizing the Household gold in India which is estimated to be more than 15000 tonnes. Muthoot Finance according to its company website has "the largest gold loan portfolio in the country". Muthoot also provides various financial services such as Insurance distribution, Wealth Management, Foreign Exchange, Money Transfer and Vehicle & Asset Finance. Muthoot Finance was selected as one of the Top 10 Finance companies to work for in India by Naukri.com[7] Muthoot Finance privately placed 4% of its paid up capital to Private Equity

players - Barings India and Matrix Partners India for Rs.1.57 billion, hence valuing the earlier privately held company at over $1 billion.

INFORMATION TECHNOLOGYEmsyne, the information technology wing of the group develops products for the service, education and healthcare industry. Emsyne offers on site and offshore services, whether project-based outsourcing / assignments, or based on time and materials. The Core Products of Emsyne are Edge - Educational Institutions Management System Finex - Innovative Banking Automation System

SECURITIESMuthoot Securities offers broking services in cash and derivatives segments at the National Stock Exchange and Bombay Stock Exchange. It has a network of more than 100 branches. Muthoot Securities launched its portfolio management services on 20 August 2009.

MEDIAChennai Live 104.8 is India's first talk radio FM station. The station would be focusing on knowledge centric and local content and will be targeting the information and entertainment needs of Chennai's intelligent community.

HEALTHCARE

The Group operates several Diagnostic & Scan centers throughout Kerala and 2 multi-specialty hospitals in Kozhencherry and Pathanamthitta.

HOTELS & HOSPITALITYMuthoot Hotels operates a 4 star resort in Thekkady (Kerala) and also operates 12 houseboats in the backwaters of Kerala under the brand Muthoot River Escapes.Kaapi Club is a chain of South Indian coffee outlets managed by Muthoot Hotels. Muthoot Hotels is in the process of constructing a 5 star luxury hotel in the city of Kochi and 5 star beach resort in Mararikulam.

HOUSING & INFRA-STRUCTUREThe projects of Muthoot Builders are primarily situated in central and south Kerala, Muthoot has a track record of more than 30 completed projects including commercial and residential spaces.

OTHER DIVISIONMuthoot has interests in Power Generation through windmill farms in the state of Tamil Nadu. The group also manages a school in New Delhi and 2 Nursing Colleges in Kerala. In the year 2008 the group re-entered the plantation business, the group has acquired 1000 acres of land in Sawantvadi, Maharashtra as a pilot planting of rubber.

PHILANTROPHYMuthoot M George Charity Foundation Set up in memory of the Late M. George Muthoot, the Foundation has been extending financial aid for its employees as part of the Staff Welfare measures. Every branch of The Muthoot Group is actively involved in Community Development and Social Welfare. The Muthoot Foundation frequently grants medical and financial aid

to deserving individuals through its welfare programs. Community support is a corporate responsibility. The Muthoot Group maintains its position as a valued and responsible corporate citizen by enhancing the quality of life in the communities where they do business. It is very important for a corporate to support the community in which it operates. The Muthoot M. George Charitable Foundation is approached by numerous organizations and individuals requesting financial and medical assistance.Muthoot Medical Centers at Kozhencherry and Pathanamthitta are super specialty hospitals set up in the rural areas of Kozhencherry and Pathanamthitta. They are both organizations established in 1989.

ENVIRONMENT RESEARCH CENTREThe Periyar Foundation set up by Muthoot Hotels is based in the town of Thekkady, near the Periyar National Park has undertaken several projects for the conservation of the national park including 'vasantha sena' and a research study along with the National Institute of Advance Studies for the conservation of 'Nocturnal Flying Squirrels'.

FINANCIAL SERVICE IN INDIA

The financial services sector contributed 15 per cent to India's GDP in FY09, and is the second-largest component after trade, hotels, transport and communication all combined together, as per the Banking & Finance Journal, released by an industry body in August 2010.Share of Financial services, banking, insurance and real estate sectors is expected to enhance by 9.7 per cent for the year 2009-10 to 17.2 per cent of GDP (at factor cost).

Data sourced from SEBI shows that the number of registered FIIs stood at 1,738 and number of registered sub-accounts rose to 5,592 as of November 10, 2010.Overseas funds infused into Indian capital market in 2010 stood at US$ 39 billion. According to data released by Securities and Exchange Board of India (SEBI), stocks and debt securities over worth US$ 17.28 billion were purchased by the foreign institutional investors (FIIs) from the Indian capital market in January 2011.According to data available with SEBI, FIIs have made investments worth US$ 4.11 billion in equities and invested US$ 667.71 million into the debt market.The average assets under management of the mutual fund industry stood at US$ 147.99 billion for the quarter ended December 2010, according to the data released by Association of Mutual Funds in India (AMFI).As on January 21, 2011, India's foreign exchange reserves totaled US$ 299.39 billion, according to the Reserve Bank of India's (RBI) Weekly Statistical Supplement.According to Venture Intelligence, a research firm, private equity firms invested US$ 7,974 million over 325 deals in India during 2010, as against US$ 4,068 million (over 290 deals) in 2009. The largest investment reported during the year was the US$ 425 million raised by power generation firm Asian Genco from investors including General Atlantic, Goldman Sachs, Morgan Stanley, Everstone and Norwest.According to a global consultancy firm Ernst & Young (E&Y), sectors such as power and transportation, consumer and branded products, infrastructure ancillaries, education and financial services, and healthcare are likely to witness increased PE activity in 2011.Deals

India Inc announced merger and acquisition (M&A) deals worth a record US$ 55 billion in 2010, including a record number of billion-dollar transactions.The number of mergers and acquisitions (M&A), private equity (PE) transactions and Qualified Institutional Placements (QIP) increased close to 40 per cent to US$ 3.23 billion in November 2010. Besides, there have been US$ 9 billion plus deals in 2010, the highest seen in any year.Fund-raising activity gained pace by almost 65 per cent in 2010 as compared to 2009. In real terms, 27 funds were able to raise US$ 13 billion as PE as against US$ 8 billion by 22 funds in 2009. There has also been a more than 80 per cent growth in PE and VC investments in India: 2010 witnessed 348 deals worth $8 billion, against 317 deals worth $4.4 billion in 2009, according to VCCedge data.Stock markets

Market capitalisation of India as a proportion of world market cap has risen to a record high. According to data sourced from Bloomberg, the country's market capitalisation as a proportion of the world market cap is currently 3.34 per cent. India's current market-cap is US$ 1.55 trillion as compared with world market-cap of US$ 46.5 trillion. This is higher than 3.12 per cent share India enjoyed at the market peak of January 2008.As analyzed by Venture Intelligence, private equity firms obtained exit routes for their investments in a record 121 companies during 2010, including 24 via IPOs. (2009 had witnessed 66 liquidity events including 7 via IPOs). PE-backed companies raised about US$ 2.20 billion via IPOs during 2010.

Insurance

The Indian Life Insurance industry is one on the strongest growing sectors in the country. Currently a US$ 41-billion industry, India is the fifth largest life insurance market and growing at a rapid pace of 32-34 per cent annually. Currently, there are 22 life insurance companies operating in India, according to the Life Insurance Council (LIC).According to data released by the Insurance Regulatory and Development Authority (IRDA), insurance companies garnered US$ 11.73 billion in new business premium during April-August 2010, against US$ 6.90 billion in the corresponding period last year.Further, according to IRDA, in October 2010, life insurance companies collected first year premium worth US$ 542.19 million (individual single premium). For the period up to October 2010, total premium collected by life insurance companies was US$ 4.66 billion, as compared to US$ 2.39 billion collected in the same period of 2009 (individual single premium).The life insurance industry is expected to cross the US$ 66.8 billion total premium income mark in 2010-11. "This year, we are expecting a growth of 18 per cent in total premium income. If achieved, it is expected to cross the US$ 64.4 billion mark," said SB Mathur, Secretary General, Life Insurance Council. Total premium income, at US$ 56.04 billion, rose 18 per cent during 2009-10, against US$ 47.6 billion in the previous year.Banking services

Significantly, on a year-on-year basis, bank credit grew by 24.4 per cent in 2010 as against RBI’s projections of 20 per cent for the entire fiscal 2010-11.

Branches in India (2749)

Andhra pradesh (334) Bihar (5) Chandigarh

(13)

Chathisgarh (6) Daman (1) Delhi (180)

Goa (4) Gujarat (106) Haryana (86)

Himachal pradesh (3)

Jammu & kashmir (10) Jharkhand (3)

Karnataka (252) Kerala (624) Madhya

pradesh (34)

Maharashtra (103) Orissa (14) Pondicherry

(7)

Punjab (105) Rajasthan (70) Tamilnadu (610)

Financial Inclusion Financial Inclusion is (A) Ensuring access to financial

services (B) Timely and adequate credit (C) Vulnerable groups (D) Affordable Cost.

India is ranked 50th in the first ever index of financial inclusion.

Out of the more than 6,00,000 rural habitations, only about 32,000 have a commercial branch.

Just over 40% of the population have bank accounts. Immense benefits for government (A) Route the social

welfare schemes directly (B) Reduce leakage (C) Reduction in time taken for the impact of benefit to be visible (D) Substantial savings in transaction cost.

How does Gold Benefit this? A 27% fall over the period of 2 years due to recession. India accounts for 18% of the global gold jewelry

consumption. Consumers demand trends for individual countries for 2009

show that India is still the top consumer, thanks to a 57% consumption growth.

The Debt Trap faced by Middle-Class & Poors. Borrowing by rural India as earnings not stable. Absence of Banks drives them to Moneylenders. High Interest Charged. Cycle of defaults and rollovers at even higher rates. Eventually title to the property is transferred to

Moneylenders.

Advantages of Gold Loans Avoid debt trap. Simple procedure, fast disbursal. No depreciation of underlying asset. No questions asked. Suited for unorganised sector. Gains for wider economy.

Rise of Gold Loan Markets. Wanning resistance among Indian midlle and upper middle

class towards gold loans. Rise in price of yellow metal. Disappearance of social stigma attached to gold loans. Lower interest rate- purer the gold, lower the interest rate. Simple process.

Loans dispersed for amounts ranging from 10,000 to 4,00,000 for NBFC and 25,000 to 1,00,000.

Process for Obtaining Gold Loan. Approach Bank/NBFC for Loan Against Gold. Evaluation of purity of Gold. Paperwork for Mortgage Disbursal of loan On repayment of the Loan, you get your gold back from

the Lender.

Gold loan market- Spectacular Growth. CAGR of 38% over a period of last 7 years. Expected to grow annually 35-40% over next 3 years. Gold loan market has grown from 25 billion in FY-2002 to

250 billion in FY-2009. Loans dispersed at an average interest of 13%, banks

charge PLR+200-400bps. 15% Y-o-Y increase in number of people taking gold loans

and 28% increase in dispersals during the same period. Muthoot has seen 75% growth in number of persons

availing gold loans and 81% increase in dispersals. HDFC bank has clocked 60% growth.

Muthoot Finance – Quick Stats. Maximum per gram rates- 1600/gram for standard 99.9%

purity of gold. 0% processing fee and no hidden cost. Rates of interest starting from 1% per month. 8 different schemes suiting all categories. Only identity proof required. Any person- Number of account required.

Interest only for actual number of days. 100% insured and gold kept in strong rooms only. Anytime redemption facility without penalty. Special rewards points for M-Power card holders.

Road Ahead Potential vechile for social transformation. 65% of gold stock with rural household. 75% of the gold loan market is still in unorganised sector. Government needs to encourage growth. Separate classification needed, needed to separate it from

unscrupulous money-lenders, distinction between NBFC lending and loan against gold.

Gold monetisation process will open up the sector and enable the circulation of 18,000 tonnes of gold (worth approx 30,00,000 crore) back into the economy.

Gold Loans- Personal loan against gold: A financing option for short term needs

For Indians, gold is considered as an essential investment from a cultural, emotional and safety perspective. One bought, is a

dead investment. It tends to lie in the locker not earning you any money. Why not make use of it in your time of need?  You can monetise this idle asset to help you tide over your financial need. So if ever you find yourself in need of money, consider gold loans as an option. Gold loans also know as gold deposits are loans given by banks/ NBFCs by taking gold as a security.Gold loans are not new to the Indian market. It existed but in the unorganised sector where money lenders used gold as a security for providing loans. Now banks have entered this space in a big way because the market is very large considering the fact that most Indians tend to have sufficient investment in gold. More importantly, with more and more women working in the family, people have become broadminded. So the social stigma that was once attached to taking a loan on gold is gradually being eliminated.Off late, this product has become popular because of the substantial rise in gold prices. The quantum of loan that one can get by giving gold as security has increased tremendously making it an attractive loan proposition.

What is the process to be followed to obtain a gold loan?

You offer your jewellery to the lender who can be a bank or an NBFC. The lender will evaluate the purity of the jewellery. The charge for evaluation is generally borne by the borrower. Once the evaluation is done, the paper work for the mortgage is done. Banks will ask you to produce personal documents such as Pan Card, address proof among other things. The lender will give you a loan which in most cases can be up to a maximum of 80% of the value of the jewellery. After having repaid the loan, you get your gold back from the lender.

Features

Secured Loan:Gold loan is essentially borrowings against the security i.e. gold. Thus this loan should be taken only if you’re absolutely sure that you will be able to repay the loan else you may end up losing your gold. Tenure: Gold loans are typically for duration of 3 to 12 months. They are thus best used to fund short term monetary requirements. No end use restrictions: The loan can be taken for any purpose so long as the money is not being used for speculative purposes Loan amount: In most cases, the maximum loan value is not more than 80% of the value of gold. Most banks deal in relatively higher loan amounts. NBFCs on the other hand, deal in small value loans Interest Rate: The interest rate charged by banks can be in the range of 11.5% and 15%. Banks usually charge a processing fee while NBFCs may not charge the same. The rate of interest charged by NBFCs is much higher as compared to banks. Repayment: The loan can be foreclosed at any time without any penalty. In case of irregular payment of EMIs, a penal interest of up to 2% is charged by banks. Market risk: The lender retains the exposure to the market risk arising from movements in the market price of gold

Advantages

Quick processing: Gold loans require minimum documentation and hence it can be resorted to in times of urgent need. Banks maintain that it takes a few hours to get a gold loan and in NBFCs like MANAPPURAM FINANCE (GOLD LOAN SUPER COMPANY) it takes only a few minutes.

More attractive than a personal loan: The rate of interest charged on gold loans tends to be much lower than that of a personal loan. Therefore, it may be worthwhile putting you asset to work and thus reducing your cost of loan. Emotional attachment will ensure timely payment: Most families have an emotional attachment to gold and that will make you morally responsible to repay the loan in time so that you can get back the gold that you had placed as a security Cash flow management: In a typical loan against gold transaction, only interest needs to be paid during the tenure of the loan and the principal amount has to be repaid at the end of the tenure. This allows customers the borrower to manage cash flows better. Gold loan become better option than personal loan As a substitute of taking on a personal loan at exorbitant rates of interest, it’s worthwhile to check out loansagainst gold being offered by banks. Loans with gold as security comeat a very low interest rate of around 12 %, compared with upwards of 17% on unsecured personal loans. Several banks have already begun to lend against gold.

It’s also a period when the gold loans business is expected to be a focus area for several banks because itoffers lenders an opportunity to tap the individual loans segmentwithout getting involved in risky unsecured personal loans.

Leading Gold Loan NBFC , Manappuram Finance, is planning to aggressively grow its gold loan portfolio with easyprocessing methods and competitive interest rates. Manappuram ’s gold loanportfolio has been growing at over 60 % for the past two years with twoproducts -- the gold overdraft facility offered at 14 to 15 % and goldloans at 12.5 %.

The most active players lending against gold are non-bankingfinancial companies such as Manappuram Finance which

lends at 12% and offers a loan as high as Rs 1,725 per gm, which is very close tothe market price.

“With the opportunity being vast, we will continue to look to growthis portfolio. We plan to increase the number of branches offeringgold loans from 1150 to 2500 over the course of next year, said, by one of the top official.

The World Gold Council estimates that the gold monetisation processwill open up the sector and enable the circulation of 18,000 tonnes ofgold (worth approximately Rs 30,00,000 crore) back into the economy

Ajay Mitra, managing director India, West Asia and Turkey, WorldGold Council, said, “Acceptance of gold for loans by banks andfinancial institutions is an important development that will infusegreater confidence in gold as an asset class.”

Are Gold Loans Safe?

Source: Economic Times- 14th November, 2010The glitter of gold loans

You may ignore the sparkle of the yellow metal itself, but it is really difficult to overlook the glitter of gold loans these days. In fact, spurred by soaring prices, rise in consumerism and, more importantly, changing social norms, gold loans have not only seen an unprecedented rise in recent times, but are also all set to shine more brightly in future.

Sample this: The organized gold loan market in India, pegged at 25,000 crore in FY 2009, grew at a compounded annual growth

rate (CAGR) of around 38% between FY 2002 and FY 2009 and is expected to grow at an annual rate of 35-40 % over the next three years to reach a portfolio size of 50,000-53 ,000 crore by FY11. This study by ICRA Management Consulting Services alone is enough to set the alarm bells ringing for those in the pawn broking business. The reasons for this kind of growth in gold loans, however, are not far to seek.Low interest rates

Firstly, it is convenience. “The sheer convenience of a loan proposition against such a liquid asset suits both the lender and the borrower. In some cases, it may be the last resort for the client, but it is a convenient one. Lenders find it a timeless, good business model, while clients, who need money quickly, find this the best way to raise funds,” says Jayant Manglik, president of Religare Commodities.

Secondly, it is low interest rates. In fact, borrowing against gold is fast emerging as the most preferred financing option as the interest rate charged by institutions are less compared to other retail loans such as personal loans. For instance, the rate of interest on these loans is between 10% and 24% per annum. In comparison, personal loans charge 16-26 % per annum, depending on your credit profile.Loan against gold better than a personal loan

Therefore, “it is better to take a loan against gold than a personal loan as the rates will be lower—since this type of loan is secured. Another good reason to take a loan against gold is that most banks/NBFCs allow you to pay only the interest on the loan monthly and the principal payment at the end of the term and not as an EMI; which works better from an interest perspective,” says Lovaii Navlakhi, managing director & chief financial planner, International Money Matters.

Besides, you can decide the approximate loan amount based

upon your gold value, i.e. no income proof is required unlike in a personal loan where the loan amount is decided based on your income proofs provided. The processing of the loan is also much faster because of easy documentation. Banks such as ICICI Bank and HDFC Bank may ask for your ID and other personal details which can take up to an hour while non-banking finance companies such as Muthoot Finance or Manappuram Finance claim to process the loan in a few minutes.Pledging gold is no longer considered a taboo

Also, instead of keeping gold idle in a locker at home or in a bank’s locker, “it is a good idea to borrow against it at lower rates in comparison to other retail loans. Moreover, lenders also prefer this route of financing as the default rate is negligible. In general, the loans may be provided for 70-85 % of the value of gold,” says Amar Ranu, senior manager, Motilal Oswal Securities.

Added to these is the fact that pledging gold is no longer considered a taboo and disgraceful in Indian society. This explains why gold loans are now widely recognized as acceptable means of raising funds for meeting urgent requirements by all segments of society. Some people also go for it because they find it more private than going to a neighborhood moneylender. Also, with gold prices soaring, even banks have begun to push customers toward gold loans. The transactions have become more popular as small personal lending dries up because of rising defaults on risky loans.

Tread with caution while opting for a gold loan

This is, however, not to suggest that you should throw all caution to the wind while opting for a gold loan, as the chances of losing your family heirlooms are higher in case of a dispute or default. That is because gold loans are secured loans. So if you fail to repay the loan within the stipulated loan period, a higher

interest will be charged and the gold may even be auctioned off.

“Typically jewellery is an item of personal use and its emotional value is sometime far higher than its market value. If for any reason you are unable to pay pack the loan, the lender can sell your jewellery in the market to recover its dues after which you can never get your jewellery back,” says Harsh Roongta, CEO, Apnapaisa .com, a price & features comparison engine for loans, insurance and investments.Gold loans are good in a rising market

This goes without saying, therefore, “if you need money quickly and don’t have any other assets to pledge, this is a useful avenue. But if you don’t have the confidence of returning the principal and interest in time, then you should avoid taking a loan against gold.”

Also, gold loans are good in a rising market. However, if gold prices correct drastically during the loan tenure, banks may ask for the payment of the difference.

Thus, even availing a gold loan is not without risks, which explains why you need to mull the pros and cons of pledging the yellow metal carefully and also look for some other options available before going for a gold loan. It also makes sense to consider in what circumstances you should go for it and when to avoid it.

Look for some other options!

In normal circumstances, for instance, if your credit history is bad or completely beyond repairable inner future, you can think of availing a loan against gold, that too at a discounted rate in comparison to personal loans. Customers with low or understated income can also avail a loan against gold.

However, “if you take a loan against gold for personal expenses such as a 3D TV, car or foreign trips, then it is quite possible that you may default on the loan. Also, a gold loan is not recommended for people with low financial IQ because there is a higher risk of default and your assets may be auctioned off.”

Normally, one does not plan to pledge one’s jewellery to take a loan. “Obviously, if you possess the jewellery for a specific purpose—to gift to your daughter, for example—you are unlikely to sell it. Economically, however, if the expected appreciation in value is greater than the cost of the loan, it is better to take a loan. But the period for which you propose to borrow should be short term or temporary, and you should have a high probability of being able to repay the loan on time.”

It is, however, a strict no-no to borrow against gold if you wish to use these funds for instant gratification or speculative investments. In that case it is advisable to just look for some other options!

Do’s and don'ts

Go for a gold loan only if you are looking for emergency funds and don’t have any other option.

Customers with bad credit history, low or understated income can also go for it.

Avoid a gold loan in case you are unable to repay the loan or are likely to default on repayment.

Avoid it if gold prices are likely to correct drastically during the loan tenure.

Don’t use the funds for instant gratification or speculative investment.

Bibliography:-

1. www.google.com 2. www.wikipedia.com 3. www.nbfc.com 4. www.muthoot finance.co.in5. Finance dept. muthoot finance gandhidham.