Non-banking finance companies to accept ‘paper gold’ portfolios as security

MUMBAI: Several non-banking finance companies have started disbursing loans on the back of gold exchange traded funds and e-gold certificates, taken as lien on the borrowed amount. Low know-your-client requirements and high-purity levels in gold are prompting lenders to accept 'paper gold' portfolios as security.

Non-bank lenders such as India Infoline , Reliance Commercial and Religare Enterprises , among others, have begun lending money on gold ETFs and gold savings certificates issued by mutual funds. According to fund industry sources, Muthoot Finance and Edelweiss Capital also lend against paper gold portfolios though senior officials at both the firms denied having such an option. Muthoot officials said they only accept physical gold as collateral.

"Gold funds have opened an entirely new avenue for offering loans to customers. We expect this segment to ramp up aggressively as investors start embracing this form of gold for future investments," said KV Srinivasan, CEO, Reliance Commercial Finance. Reliance Commercial is offering loans to investors of Reliance Gold Savings Fund, wherein, they can get up to 90% loan on value of gold units held up to 5 crore and up to 3 years.

According to Mr Srinivasan, know-your-client (KYC) requirements, quantity and purity of physical gold and price of gold are the prime concerns while giving loan against gold. All these factors are addressed if loans are disbursed using gold ETFs or savings fund certificates as collateral deposit.

Thorough KYC requirements are done by the fund house at the time of allotting fund units to investors. Funds invest the pool in best gold assets; this takes care of quantity, purity and price. All these factors make lending on gold portfolios easy, Mr Srinivasan said.

The trend to pledge gold ETFs and gold savings certificates (also called e-gold) is slowly catching up among affluent, savvy investors. NBFCs keep a 30-35% margin on loans backed by gold ETFs and e-gold portfolios. Interest on portfolio borrowings are between 13% and 15%, industry sources said.

"Gold is a growing asset class... people have begun buying gold in paper or demat form. The portfolio format helps investors to save on storage and insurance costs. It is only logical for lenders to start accepting ETFs and gold certificates as collateral," said Pankaj Razdan, deputy chief executive of Aditya Birla Financial Services Group .

Portfolio leveraging is a method of raising easy interest loans wherein investors leverage on their own fund portfolio to raise money that will either be used for personal purposes or re-invested into the markets - mutual funds, stocks or any other asset class of choice.

With rising prices, the trend of leveraging on gold portfolios is slowly catching up among savvy investors. Gold prices have gone up 9% over the past six months and is currently trading at 22,235 per ten grams.

Though pledging 'paper gold' is an easy way to raise money, wealth managers are not too keen to recommend it to their clients. A sharp fall in gold makes this instrument quite risky, they say. "Paper gold usually carries higher risk weightage. Investors stand a better chance if they turn their ETFs into physical gold and then pledge it," said Devendra Nevgi, principal partner, Delta Global Partners , and added, "Investors get up to 90% exposure while pledging physical gold."

Source: EconomicTimes