In early 2014, finance companies had made two major changes to their business models -periodical collection of interest and lowering of product tenures.
Earlier, gold loans had a tenure of one year and were repaid in one bullet repayment along with interest. The borrower had the option to re-pay the loan any time before maturity, and over 80 percent of borrowers repaid the loan before six months. Also, loans disbursed now are with tenures of 3-9 months as against 12 months earlier. “This enables gold loan financiers to react swiftly to any decline in the gold price,” said Crisis. Additionally, interest accrued on loans with 3-6 months is lower than loans with tenor of 12 months, so interest recovery even through auction has been higher. This is reflected in the fact that large gold loan e companies have seen a 2-5 percent increase in interest yields in fiscal 2017, compared with the previous year. “A one-year tenured loan with a provision for repayment at any time and without the requirement of periodic interest payment provides high flexibility and convenience,” said Ajit Velonie, director, Crisil Ratings.”The structural change of shorter tenure products being attempted, to an extent, takes away this very convenience that had contributed to the product’s popularity.” While growth in the gold loan business will continue to be moderate, efforts by large gold loan financiers to diversify into other lending segments will help broad-base businesses.