Fluctuating Gold Prices And Risk Management In Gold Loans

Gold loans were usually given out for a period of one year and there was no requirement about having to service interest periodically. Indeed, bullet repayment of both the principal and the accumulated interest was the norm. While defaults remained minimal and actual losses were kept well under control, there was an ever-present element of risk to this set-up.

- Shri V.P.Nandakumar

In recent months, gold prices have fallen significantly from the highs recorded last year following the widespread economic disruption after Covid-19. The international price of the metal had crossed US$ 2,000 per troy ounce in August 2020 but has now declined to about US$ 1,700 currently. Given this volatility, it is no surprise that gold loan financiers should be flooded with media queries about the likely impact of such a price correction on their profitability and growth prospects.

Having been involved in the gold loan business for decades, I speak from experience when I say that gold price volatility has next to no impact on the gold loan business, barring a short term effect which gets normalised as the new prices become the new normal. Moreover, the gold loan business has also evolved over time to make itself more resilient to these price fluctuations. The change is most apparent in risk management, where the old ways of doing things have given way to new thinking. Risk management in the financial sector is a critical function which determines whether you survive or not in a world where only the fittest survive. As the theory of evolution explains, the survival of the fittest is all about the ability to adapt and change according to the environment. The same rules apply to the corporate world, including in the lending business. For example, if Manappuram Finance Limited (the company that I founded in 1992) had continued to function exactly as it did in the '90s, it would have soon fallen by the wayside.

Gold Price trends in India

Gold prices in India have grown 15-fold in the last 30 years, from about Rs 3,000 in 1992 to Rs 45,000 level today. However, there have also been periods when gold prices went into a bearish phase.