Friday , 24 May 2019

Gold loan business loses its shine

A recent circular by the registrar of co-operative societies draws attention to the trend of burgeoning loan against gold jewellery of cooperative societies, reports Shoma Patnaik

Urban cooperative credit societies in Goa are in the public eye lately, and unfortunately for the wrong reasons. They are in the news for high level of non-performing assets (NPAs) caused by excessive exposure to the mining industry. Credit societies are also in the news for accepting large deposits from members without PAN numbers. Post- demonetisation they have been identified by the income tax department for being the depository of undeclared income. Frequent raids by tax sleuths are keeping several co-operative credit societies in news.

The latest reason for credit societies to come into limelight is the circular from the Registrar of Cooperative Societies asking for a discontinuation of loan against gold jeweler. It is a business segment that is growing in Goa. The circular is directed at all the urban cooperative societies and at the multipurpose societies.  It has caused confusion in the co-operative sector with many reverting back to the registrar for clarifications.

According to cooperatives, the circular is meant for those cooperative societies that have not included lending against gold in their byelaws. It does not ban the gold loan business completely.

Prakash Velip, chairman, Quepem Urban Cooperative Credit Society, says, “As per cooperative laws members have got every right to conduct business of their choice and do not need to change byelaws for any new business.” Velip adds, that, the circular will have limited impact because most cooperative societies that conduct gold loan business have already included it in the byelaws. “The remaining which have not amended the byelaws will soon do it,” he says.

Velip points out that, banning loan against gold business will hit the cooperative sector badly. “Gold loans are secured and popular,” he says because of a number of reasons. “The loans do not require board of directors approval as the power of sanction is given to the manager,” points out Velip. He adds that, the circular issued by the registrar needs clarity.

A general manager of a credit society pointed out that, gold loans are increasing in the overall basket of loans because they are offer collateral that is easily available to all segments of borrowers. “Every family has some quantities of gold and it is the easiest asset to pledge to raise money,” he says.  PS Kunkolienkar, independent director, Quepem Urban Credit Society, points out that, the gold loan portfolio of most urban credit and multipurpose societies are increasing. “It is not less than 10 per cent of the loan portfolio,” he says.

Ground level check reveals that defaults in gold loans takes place but lenders are not worried because gold can be auctioned. The loans require proper appraisal of the gold by a certified valuer. The typical tenure ranges between six-months to one year and the loan ticket size is below Rs one lakh. Cooperative societies point out that, customers prefer to come to them for such loans as they offer lower rate of interest that the gold financing companies.

The circular issued by the registrar is because of the trend of excessive dependence on the loans by cooperatives. It says that,  “It has been observed that societies tend to develop snags in the process of loan transactions caused by procedural flaws and loopholes in the process of appraisal of loan proposals and the valuation report of the valuer.” Further, “failure to go by the valuation report for reasons ranging from inadvertency to indifferent attitude of the personnel or lack of adherence to procedures cooperative societies face the risk of heavy loss.”

Some time back the issue of loan against fake gold ornaments was highlighted in the media. “Such cases make the functioning of cooperative societies come to a standstill and put general members and depositors in distress. It also causes embarrassment to the regulating authority,” the circular sates.

To prevent cooperative societies from losing funds due to improper gold loan transactions, the circular says that, it is advisable to discontinue the practice of dispensing funds against gold loan securities.

Meanwhile the lending against gold ornaments is a business not only of the credit societies. The urban cooperative banks are robust in this segment too. “The circular is unfair on credit and multipurpose societies,” is the general opinion.