Borrowers Perspective towards Gold Loan Protection Practices Followed By Banks and NBFCs M.S. Sibi Research scholar Department of Business Administration, Annamalai University Tamil Nadu - India Abstract This paper covers the gold loan protection practices among borrowers in financial institutions. The aim of this paper is to collect the borrowers opinion towards protection practices followed by Banks and NBFCs. The aim was achieved through a descriptive study involving a survey. The dataset from the sample underwent series of statistical analysis, i.e. correlation analysis and one way ANOVA. Loan against gold are traditionally considered taboo especially in Indian households. Even when gold is pledged, it is still done as the last resort. Key words: - Banks, NBFCs, Gold loan, protection practices Introduction The Indian financial system comprises financial institutions, financial markets, financial instruments and services. Financial institutions act as mobilizers and depositories of savings, and as purveyors of credit or finance. They also provide various financial services to the community. Financial institutions are divided into banking and non-banking corporations. Banking sector reforms in India strive to increase efficiency and profitability of the banking institutions. The existing banking institutions have to face the global competition. Amidst this challenging scenario, the Indian banking system continues to deal with improvement in operational efficiency and execution of prudent risk management practices. The non-banking financial institutions act as mere purveyors of credit. The non-banking financial intermediaries supplement the functions of the banking institutions. NBFCs are financial intermediaries engaged primarily in the business of accepting deposits, delivering credit. NBFCs supplement the role of banking sector in meeting the increasing financial needs of the corporate sector, and delivering credit to the unorganized sectors to small local borrowers. Overview of Gold loan provided by Banks and NBFCs India s top Banks are now vying for market share in the gold loan business, which has so far remained the forte of NBFCs and few Banks in the south. At a time when credit demand has been dwindling because of high Interest rates, Banks have stepped up lending against the yellow metal. Financing against gold being a secured form of lending, and higher margins are the key reasons why Banks are expanding this portfolio. India s organized gold loan industry has grown rapidly in the last two decades. However, during FY 2012-13, the sector ran into strong headwinds with the RBI s intervention in March 2012 that effectively altered the rules of the game overnight. A cap of 60 percent on the LTV for gold loans given by NBFCs was imposed by the RBI citing increased concentration risks. History of Gold Loan Internationally, pawning of gold, gold articles or gold jewellery is a huge and established market, the gold loan companies being typically known as pawn brokers. For example the National Pawnbrokers Association of the UK and the National Pawnbrokers Association of America provide the necessary support to the growing network of responsible pawnbrokers in UK & USA, respectively. Similarly, in India we have Association of Gold Loan Companies (India). In the history of pre-independent India, pawn brokers have existed in plenty, which have forced the State Governments to pass money-lending laws (for e.g. Bengal Moneylenders Act, 1940, Bombay Money Lenders Act, 1947 and the Kerala Money-Lenders Act, 1958 etc). Over the years, gold loan companies witnessed an increase in the Indian market owing to pledging of gold ornaments IRJBM (www.irjbm.org ) Volume No VII September - 2014 Issue 9 Page 28
and other gold assets by the poor and middle class in order to tide over the unforeseen contingencies. The jewellery bought in times of prosperity was pawned or sold for cash in periods of distress and were even being used as collateral (primarily by pawning ) for borrowing in the informal market. At times of emergency, gold ensured, and still ensures, a loan almost instantly and without any lengthy or technical documentation process. Further, with the growth in middle income classes and increase in the earning capacity of women, demand for gold surged. Lending against gold has been one of the most popular instruments based on gold, and it works well with the Indian rural population, which typically views gold as an important savings instrument that is liquid and can be converted into cash instantly to meet their urgent cash requirements. Moreover, traditionally gold owners in southern India are more open than elsewhere in the country to accept and exercise the option of pledging gold to borrow money. Protection practices for Gold Loan Borrowers Applications for Loans and their Processing. Loan Applications must contain necessary information about the borrower and the details regarding the documents required to be submitted. Loan Appraisal and Terms/Conditions. Loan has been sanctioned immediately after the verification of identity/address proof and satisfactory appraisal of the gold ornaments offered as security on the same day itself. The loan document (Pledge Form) showing the amount of the loan sanctioned and particulars of the security offered along with the terms and conditions of the loan, will be got signed by the borrower in token of acceptance of the terms and conditions. A copy of the Pledge Form is issued to the borrowers. Disbursement of Loans including changes in Terms and Conditions. The Company has been gave due notice to the borrower of any change in the terms and conditions and also changes, if any, in the rate of Interest and other charges. They will be effective only prospectively. Decision to recall/ accelerate payment or performance under the Agreement will be in consonance with the loan document. Strict 'Know Your Customer' () norms, prescribed by RBI, are compelling gold loan companies to put in place better customer identification practices. Now, the company is asking borrowers to produce Aadhar cards for identification purpose. Review of literature Rosita (2010) has focused attention upon Gold loan which served financial support to the borrowers, she noted that the loan meets urgent needs and gold is considered an essential investment from a cultural, emotional and safety perspective. Gold loans also known as gold deposits are loans given by Banks/ NBFCs by taking gold as a Security. In researcher opinion Gold loans are not new to the Indian market. It existed but in the unorganized 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. George Alexander Muthoot (2013) focused on the safety measures of borrowers. This noted that the large gold loan NBFCs are almost like banks and are well-governed, with established policies and procedures. Their branches have sufficient security measures such as strong rooms, CCTV cameras, guards and also specific procedures regarding access, in order to ensure safety of the collateral. Besides, they insure the gold against theft and other unforeseen events. Audits and inspections guarantee the continued integrity of the holdings. Handling and storage is also done carefully, so as to avoid damage to the ornaments. Apart from these, the reputation of the lenders and IRJBM (www.irjbm.org ) Volume No VII September - 2014 Issue 9 Page 29
transparent institutionalized procedures followed by them assures borrowers of a fair deal. The major gold NBFCs have in place proper (know your customer) as well as Fair Practice Codes. In cases of recovery, too, borrowers are given notice and a chance to redeem the gold or keep their auction in abeyance through payment of interest, as in any bank. The author said that, when a borrower approaches a lender, he/she calculates the costs not only in terms of interest, but also in terms of security,, documentation procedures, appraising methods, auction procedures, etc. Many borrowers from gold NBFCs are migrants from pawnbrokers. For them, the rates charged by the NBFCs are considerably lower. The others that come weigh all the benefits of the NBFC experience against that at a busy bank branch. Methodology Objectives of the study To find out the attitude of the borrowers towards protection practices followed by gold loan institutions. To assess the norms, documentation and interest are related with the protection practices. Sampling Design The sampling procedure adopted is non-probability sampling and the type of sampling followed is convenience sampling. This study has been conducted among gold loan providing Banks and NBFCs.A sample size of 205 respondents is taken for detailed study.among these 205 respondents 43 respondents were selected from the HDFC Bank, 52 from South Indian Bank and another 57 from Manappuram Finance Ltd and 53 respondents from Muthoot Fin corp Ltd in the area of Chavakkad taluk, situated in Thrissur district (kerala). Methods of Data Collection The study is based on primary and secondary data. Primary data are collected through a structured questionnaire which was specially prepared for this study. The questionnaire contained 44 questions regarding protection practices followed by gold loan providing Banks and NBFCs. And 5 point likert scale was used for frame the questionnaire. Secondary data are collected from various published books, journals, magazines, newspapers, websites and past records from various governments, Private organizations involved in gold loan operations as well as regulations. Period of study The questionnaires were collected during the period of April 2014 to May 2014. Statistical tools used Correlation analysis and one way ANOVA. Data analysis Correlation analysis INTEREST DOC INTEREST Pearson Correlation 1.021 -.099..764.159 NORMS Pearson Correlation 1 -.050..480 DOCUMENTATION Pearson Correlation 1. IRJBM (www.irjbm.org ) Volume No VII September - 2014 Issue 9 Page 30
One way ANOVA Anova for different age of respondents on gold loan protection practices. SCALE DEMOGRAPHIC N MEAN SD DF F P AGE less than 25 28 3.3571.57606 INTEREST 26-35 113 3.4259.52971 36-45 51 3.2917.51275 3 1.245.295 more than 46 13 3.2019.43761 Total 205 3.3689.52798 DOCUMENTA- TION less than 25 28 3.5714.51287 26-35 113 3.5853.56629 36-45 51 3.5182.52291 more than 46 13 3.6484.49698 Total 205 3.5707.54186 less than 25 28 3.5357.40709 26-35 113 3.5348.38455 36-45 51 3.5126.28310 more than 46 13 3.5165.21459 Total 205 3.5282.35437 IRJBM (www.irjbm.org ) Volume No VII September - 2014 Issue 9 Page 31 3.273.845 3.054.983 Anova for different occupation of respondents on gold loan protection practices SCALE DEMOGRAPHIC N MEAN SD DF F P OCCUPATION Business 70 3.3732.54941 INTEREST Professional 43 3.4128.50997 Housewives 5 3.3500.40889 3.161.922 Service 87 3.3448.53169 Total 205 3.3689.52798 Business 70 3.5878.54523 Professional 43 3.7076.54439 Housewives 5 3.5714.76931 3 1.607.189 Service 87 3.4893.51904 Total 205 3.5707.54186 Business 70 3.5918.36989 Professional 43 3.5415.38756 DOCUMENTATION Housewives 5 3.4286.17496 3 1.541.205 Service 87 3.4762.32654 Total 205 3.5282.35437 Findings The result of Karl Pearson coefficient of correlation clearly indicated about the relationship of one variable with another. The first variable norms is significantly related to Documentation and Auction procedures. The second variable DOCUMENTATION is not significantly related to Auction procedures.
The third variable AUCTION PROCEDURES is significantly related to and Documentation. One way ANOVA table shows the variance/difference between demographic variables and study variables. The first demographic variables AGE indicate that there is no significant difference between, Documentation and there is a significant difference with interest. The second demographic variable OCCUPATION shows that there is no significant difference with Interest, but there is a significant difference between, documentation. Suggestions The widely prevalent practice of issuing a small pawn ticket needs to be replaced with proper loan contract, indicating all the applicable terms and levies and penal interest charges transparently. The gold loans institutions may obtain a copy of PAN Card in all the loan proposals exceeding rupees two lakhs to strengthen mechanism of. The documentation has to be standardized with all required details and legal requirements. Conclusion Gold loans business by NBFCs as well as Banks helps the marginal and vulnerable sections of society in meeting their necessary funding requirements. In view of the fact that the financial services should be made available to the users at reasonable prices/charges in line with the objectives of fair practices code and financial inclusion, particularly for the financial transactions involved with low income group, the business practices followed by gold Loan Institutions needs to be monitored and reviewed. References 1. Basu.S.K. (1961), Non-Banking Financial Intermediaries and Monetary Policy, the Banker New Delhi, pp.755-761. 2. Bhole L.M, Financial Institutions and Markets, II Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, page.10-15. 3. George Alexander Muthoot (2013) gold NBFCs offer potential borrowers superior advantages in terms of cost and security, business line, page 1-2. 4. Krishnamurthy.S (1995), Non-Banking Financial Intermediaries, Deccan Publications, Madras, pp.62-65. 5. Malhotra, R.N. (1990) The Evolving Financial System, RBI Bulletin. 6. Peer Mohamed.S, Akbar batcha, Shazuli Ibrahim (2007), research methodology, pass publications, Madurai, page no: 1.1-3.1. 7. Potti.L.R, Quantitative techniques, Yamuna publications, Trivandrum, page no: q1 to q20, t1- t24. 8. Potti.L.R, Book of statistics, Yamuna publications, trivandram, page no: H1-H32. 9. Ravilochanan.P (2013), Research methodology (with business correspondence and report writing), second revised edition, Margham publications-chennai, page no-1.1-7.1. 10. Rosita (2010) Gold Loans- Personal Loan against Gold: A Financing Option for Short Term Needs, May 19th. Page: 1-2. 11. Venkateswaran.N (2012) Indian consumers towards gold loan market Indian Streams Research Journal, Volume: II, Issue: XI, page 1-5. IRJBM (www.irjbm.org ) Volume No VII September - 2014 Issue 9 Page 32