Abandoned gold loans are India’s “jingle mail”

Abandoned gold loans are India’s “jingle mail”

MARCH 25, 2013

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The myth that Indians’ love for gold is driven by tradition rather than financial self-interest has been dashed. Falling prices have prompted borrowers who took out loans secured against the yellow metal to break a cultural taboo and abandon their collateral. It’s the Indian equivalent of American homeowners who walked away from their underwater mortgages by mailing the keys to their homes to the bank.

India’s version of the “jingle mail” came to light when Manappuram Finance, a lender against gold, recently warned that defaulting borrowers would force it to report a quarterly loss. The lender’s Mumbai-listed shares tanked 31 percent over just three days. The precipitous fall was partly due to concerns the company had selectively leaked its guidance — a charge Manappuram denies. But clearly the lender, which was forecasting a profit as recently as February, had underestimated the borrowers’ response.

Borrowing against gold is popular among those who have trouble getting conventional loans. The formal gold loan market has about $30 billion in assets; the pawnshop-dominated informal market is probably several times as large. As recently as the fourth quarter of 2011, companies were offering to lend $100 against jewellery valued at just $110. With annual interest rates at around 26 percent, it only made sense to repay the loan if the value of the gold had risen to $126. But the local-currency price of the same gold has now fallen to about $105.

Last year, India’s central bank acted to contain the risks. It restricted finance companies from making loans exceeding 60 percent of the value of gold held as collateral. But deals that were struck at higher loan-to-value are now under water. Lenders have little choice but to seize the collateral, and take the hit to their earnings.

In January, a panel set up by the central bank recommended loosening loan-to-value ratios on gold-backed credit to 75 percent. The ongoing fiasco shows that any such move could be fraught with risks. It isn’t the subprime borrowers who pose a threat to the system. They will simply behave in their self-interest. It is the lenders’ ability to act in the interest of their shareholders that can’t be taken for granted.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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