I extract certain paragraphs from LFIN report on Gold loan issues and risk management.
Open for discussion.
From the Company’s perspective gold
loans are a highly lucrative segment.
Given the sentimental value attached to
gold and the high level of redemption,
whilst the easily liquefiable nature of the
asset further reduces its risk exposure.
The short-term nature of the asset also
results in improving the Company’s asset
liability maturity mismatch.
The strategies were redefined in the
latter part of the financial year as the
Company forecast a plunge in the gold
market. Therefore the Company reduced
the advance percentages as a prudent
Enhancing the recovery process through
automated reminders direct to customers
and a dedicated call centre to follow
through on these reminders.
We anticipated a decrease in the gold
prices and reduced the duration mainly to
one month loans against gold. This has
reduced the negative impact of gold prices
to the Company.
As the strategy the Company was able
to shift the portfolio to one month tenor
which accounted for 46% in 2012/13
compared to 18% last year.
Overall profitability of the product was
however impacted by a sharp decline
in gold prices during the year. The
loss in value of the security as well as
losses upon disposal of unredeemed
gold required the Company to make an
impairment provision amounting to
Rs. 220.26 million for the year 2012/13.
We have identified the importance of
monitoring and forecasting gold price
movements, on a more consistent and
accurate basis. Also, underwriting and
monitoring of this segment will be
With the strengthening of the business
line the Company is confident that gold
loans will continue to be a key growth area
in the coming year."
Slstock Note :
1) Gold flucuated from $1550 to 1800 in 2012/2013 year for LFIN.
So for about 13 % fluctuation , impairment increase( as above) was Rs 220 Million.
Total impariment is 310.68 million.
2) From March to June 2013 drop will be about 13-15% ( if it stay around $1400-1350 )
With the precautions they have taken , what do you think the loss impact might be .
Anyway this gold issue might not be bad as one expects after the risk management for finanical yeat 2013/14.
3) Gold prices are expected to drop further. But if they gradually drop, the issues for these companies might
be controllable with risk management.