6.

Interest Calculation on Loan The interest towards the loan borrowed can be re-paid by any of the two options that are provided to the customer. The payment can be:
Payment of monthly interest and principal payment at the end of the tenure.

Payment by way of EMI. Part payment of principal and interest on a monthly basis.

A hypothetical case is taken to illustrate how the calculation of interest is done under the above three cases.
Payment of Monthly Interest and principle payment at the end of the tenure
A customer borrows Rs.1000000 under a particular scheme of Loan against Gold. The rate of interest under that scheme is 18% p.a. He opts for repayment whereby he will pay interest per month and full payment of principal at the end of the tenure. The tenure in this case is 12 months. He borrows the amount on 1st of January.

In his case, the calculation of interest will be as follows: At the end of each month, he has to pay an interest of Rs.1500 (100000 X 0.015) He has to pay the above interest amount for a period of 11 months. For the last month, he must pay the amount of Rs.101500 ( Principal and Interest of last month)

Payment by way of EMI. In this method, there is need to calculate the EMI by using following Formula : EMI = P x r x (1 + r)n / ((1 + r)n -1) Here, p=principal amount r = Interest rate per month (ex: if interest rate per annum is 10% then 10/ (12*100)) n= tenure in months

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Example
A person has taken a loan against gold of Rs.1000000/- on 10/1/10 at 18% p.a. The tenure of the loan is 1 year. He has opted for re-payment by way of EMI. So, in his case, the calculation of interest will be as follows:

The EMI is calculated by using the above formula: EMI= 1000000 x 0.015 x (1.015)12/ ((1.015)12-1) Therefore EMI for next 12 months =9168.00 P=100000 r= 0.015 per month (i.e. 18% p.a) n= 12 months Hence, the equated monthly installment the customer has to pay is Rs 9168. So, the net amount that he will pay in the course of 12 months will be, Rs.110016 (9168 x 12) Hence, the interest income will be Rs.10016 (110016-100000)

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7. Break Even & Profit Projections The calculation for arriving at the break even is done by making certain assumptions which are pertaining to Loan against Gold business. There are three scenarios under which the calculations are made: Scenario 1 Assumptions

Initial loan disbursal is 10 lacs and then it increases @ 20 % per month for first nine months. Thereafter the increase is 50%. Interest earned on disbursal =1.5% p.m, 18% p.a Expenditure is assumed to be constant over the period. Cost of Funds is assumed to be at 10% p.a, i.e.0.833% p.m
It is assumed that 30% of the Opening Balance is repaid every month till 3 months, then for the next three months 50% is repaid and at the end of the 7th month 100% of the opening balance is repaid. This cycle continues.

Notes The figure in the row of Net Amount Outstanding is the closing balance of that particular month. i.e. It will be the opening balance for the succeeding month as shown in the Opening Balance row. The Net Amount Outstanding of a particular month is arrived by the calculation as,(A-B+C)

Break Even Period The BEP will be achieved in the month of May next year. Total Revenue after 17 months Less Total Cost Profit/(Loss) after 17 months 395,428 3,62,631 32,797

Scenario 2 Assumptions

Initial loan disbursal is 10 lacs and then it increases @ 20 %, 30%, 40%, 50% and 35% each month for every three months respectively. Interest earned on disbursal =1.5% p.m, 18% p.a Expenditure is assumed to be constant over the period. Cost of Funds is assumed to be at 10% p.a, i.e.0.833% p.m
It is assumed that 30% of the Opening Balance is repaid every month till 3 months, then for the next three months 50% is repaid and at the end of the 7th month 100% of the opening balance is repaid. This cycle continues.

Notes The figure in the row of Net Amount Outstanding is the closing balance of that particular month. i.e. It will be the opening balance for the succeeding month as shown in the Opening Balance row. The Net Amount Outstanding of a particular month is arrived by the calculation as,(A-B+C)

Break Even Period The BEP will be achieved in the month of March next year. Total Revenue after 16 months Less Total Cost Profit/(Loss) after 16 months

6,66,437 3,62,631 3,03,806

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Scenario 3 Assumptions Initial loan disbursal is 10 lacs and then it increases @ 15%,25%,35% and 45% each month for every three months respectively. Thereafter the increase is @ 30%. Interest earned on disbursal =1.5% p.m, 18% p.a Expenditure (Net) is assumed to increase @ 2% for first 6 months then the increase is @ 4% for next 6 months and 5% thereafter. Cost of Funds is assumed to be at 10% p.a, i.e.0.833% p.m
It is assumed that 30% of the Opening Balance is repaid every month till 3 months, then for the next three months 50% is repaid and at the end of the 7th month 100% of the opening balance is repaid. This cycle continues.

Notes The figure in the row of Net Amount Outstanding is the closing balance of that particular month. i.e. It will be the opening balance for the succeeding month as shown in the Opening Balance row. The Net Amount Outstanding of a particular month is arrived by the calculation as,(A-B+C)

Break Even Period The BEP will be achieved in the month of July next year. Total Revenue after 19 months Less Total Cost Profit/(Loss) after 19 months 1,212,409 362631 849,778

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7. Comparison with Existing Players The comparison of FCFSL is made with the existing competitors. Viz. Muthoot and Manappuram. The comparison is made on the following aspects: Branch Structure Schemes offered Interest/ Penalty Calculations Loan to Value

At Future Money

Branch Manager

Customer Care
Executive Valuer

As per the comparison in branch structure of Manappuram Finance, Muthoot Finance,

& Future Money, following observations are made. They are as follow: There is same branch structure in the Manappuram Finance & the Muthoot Finance. In branches of Manappuram Finance & Muthoot Finance, there are three layers of management namely top level, middle level and bottom level In branches of Manappuram Finance and Muthoot Finance, it found that the Branch Managers are the head of functioning of branches & responsible for various submissions of various important reports at Head Office. Assistant Branch Manager is responsible for supervise the work of Customer Care Executive, Junior Executive, Account Executive and Valuer of branches and also responsible for submission of various reports to Branch Manager. While Valuer, Junior Executive, Account Executive and Customer Care Executive are to be responsible for gold valuation, helping to other colleagues of branch, maintain the branch book of account and cash book etc and handle the enquirers, customers etc. respectively. It means

Branch Grade Branch Manger

Asst Branch Manager Valuer Account Executive

Duties & Responsibilities Head of the Branch, Manage the functioning of branch. Also submit daily important reports to branch. Supervise the work of bottom level employees and also m ake im portant submission to branch manager. Check the gold and decide the loan amount. Maintain the books of account of branches and also

Jr. Executive
Customer Care Executive

acting as cashier of the branch Help the other colleagues of the branch or handle the operation of the branch. Handle the enquirers and customers coming in the branch.

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But in Future Money, find the following difference in respect of

There are only two level of management There are only three peoples in branch.
Each one in Future Money branches plays dual role of responsibilities. For

Example Branch manager is acting as Branch Manager and also as Assistant Branch Manger responsibilities. Valuer is responsible for Account Executive responsibilities as well as valuation of gold i.e. his own job. Customer Care Executive is responsible to Junior Executive of the branch as well as handling the enquiry and customer of the branches i.e. his own responsibility It will clear from below charts

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Schemes Offered At Manappuram Finance Schemes X S3 A B C D S5 X Plus Loan Amount 1787.00 1572.00 1687.00 1637.00 1437.00 1287.00 1637.00 1812.00 ROI 2.34% 1.42% 2.25% 2.25% 2.25% 1% 1.59% 2.34% Days 30Day s 30Day s 90day s 180day s 365day s 30Day s 30Day s 30Day s

Interest rates calculated on daily basic S3 calculated on 5days basic S5 Calculated on 30Days basic X Plus scheme for 6months older customer & had a transaction of more than Rs.1lac for last 6 months

At Muthoot Finance Schemes TPL XPL EPL/ PPL CPL ROI 1% 1.5% 2.04% 1.07% B/B 1025.00 1500.00 1610.00 Chains 975.00 1475.00 1560.00 Studs 925.00 1425.0 0 14700.0 0

CPL is only for Bank Gold Coins.

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The Platinum scheme is offered at the lowest ROI i.e. 0.95%. The processing fee for the same is Rs. 250 for loan upto 2 lakhs and Rs.350 for loan above 2 lakhs plus service tax of 10.33% However, the customer needs to make an advance payment of interest to avail this scheme. After the end of the tenure, i.e. 3 months the customer has to pay the amount or he can shift to another scheme.

By making comparisons for scheme of gold loans of major player with future money following things found
For higher loan amount offering schemes there is higher rate of interest.

Not on records of Manappuram Finance but they also follow solid or B/B, chains or ornaments, others or stud pattern.
The future money is new in business so that they come up with new scheme like Platinium to attract the customer & to create customer base so they will be offering loan at 0.95 % per month for new customer along with processing fee. After three months that customer is placed into any of the existing scheme.

There is no provision for staff gold loan but in future money there is provision for Staff of the company where bank offering only 1% per month interest rate to staff. There is no major difference in ROI of three company

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Interest/ Penalty Calculations

At Manappuram Finance The interest is calculated on a daily basis.

The lock-in interest depends upon the scheme varying from 5 days to entire 30 days.

In case of late payment of interest, the penalty interest rate is to be paid on the after the due date of each month (i.e. if the due date of interest payment is 31st January 2011 and borrower is not able to repay the loan interest then penalty interest will be charge from 1st February 2011 onward) At Muthoot Finance The interest is calculated on a daily basis. In case of late payment of interest, the penalty interest rate is to be paid on the entire period (i.e. From the Beginning of Interest calculation date to the date of payment of interest) At Future Money The interest is calculated on a daily basis at Future Money. However, if the customer repays the loan within a period of less than or equal to 7 days from the date of availing the loan, he has to pay the interest on whole 7 days. At Future Money, in case of late payment of interest the penalty is charged only on the number of days prior to the due date of interest. (Such feature is not available at Manappuram and Muthoot Finance Loan to Value

In Manappuram finance, it is found that the loan to value is 89% to 85% of gross weight. For example Ornament Chain Gross Weight 14.5 grams Net Weight(89% LTV (Rs.) of Gross Weight) 12. 23375 9 (12.9*1812)

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In Muthoot finance, it is found that the loan to value is 100% of gross weight. ( as per the visit in Miraroad & Malad branch) Schemes ROI (%) Gr Weight= Rate Nt weight gram 14.5 14.5 14.5 14.5 1525 1455 1275 850 per Amount Offered (Approx. ) 22500 21000 18500 12000

EPL XPL RPL TPL

2.25 1.58 1.33 1

But in Future Money, it is found that the loan to value differed on the basis of gold cartage Gold carat 18 to 20 22 23 24 LTV (% of Gross Weight) 75 to 80 83 85 90 to 100

So, Net weight and Amount to be offered was calculated as, Gross Weight x LTV % (Based on caratage of gold) = Net Weight
Amount Offered = Net Weight x Rate per gram under a specific scheme.

In Manappuram Finance & Muthoot Finance, they are not accepting the gold below 20 carats but in future money they accept the gold below 20 carts.

Conclusion

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Gold loan business is not really new to Indian Economy. But today due to rise in the price of gold the demand for gold loan rises fast. Today many organizations want to enter into the business the business of gold loan. Many banks, NBFC are also assumed that it will be good replacement to personal loan.
Even gold loan business was secured even during the economic meltdown as jewels are as good as cash on hand and can be converted into cash in any corner of globe.

Today, the Manappuram Finance and Muthoot Finance are the leader in this business. Due to limited players in market for providing the gold loan, there will be huge scope of any established company or groups of company to enter into this business. So, this project is useful to those who want to enter into this business, understand the risk in this business & also helps to understand how to mitigate with the risk of this business. It also helps the existing players as well as new players to know what the customer need from they.
This project reports explains product norms of gold loan, process of gold loan providing, duties of responsibility of peoples in branches, valuation of gold jewellary. The schemes of the every existing player are same because the main principle of these business while lending the money to the lender, other things being equal, higher the loan to value, higher rate of interest and vice-versa.

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Bibliography www.Indiamicroinance.com/ gold loan-the-new-financial-eldorado.html www.manappuram.com www.muthoot.com www.futuremoney.com www.moneylife.in/article/goldloan www.stockwatch.com www.economicstimes .com

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