This document prescribes the guiding principles of fixing interest rate on gold loans and other loan schemes of Muthalagu Finance Ltd., as enumerated below.
The rate of interest on gold loan schemes are fixed taking into account various factors such as cost of funds, overhead costs, fair return on capital employed, market conditions and guidelines of Reserve Bank of India regarding Fair Practices Code.
The Board of Directors of the Company or a Committee drawing authority from the Board, while fixing interest rates on Gold Loan Schemes shall be guided by this policy document for Interest Rate Fixation.
In addition to cost factors set out hereunder, the Board or the Committee shall be guided by the market conditions and various relevant rules and regulations, if any, prescribed by the Reserve Bank of India or such other competent authority from time to time.
Interest charged under various Gold Loan Schemes shall have the following components:
Basic Interest Rate
Risk Interest Rate
Penal Interest Rate
Basic Interest Rate
Basic Interest Rate represents the rate chargeable under every Gold Loan Scheme irrespective of the risk weight attached to the nature of the scheme. Basic Interest shall be arrived at after considering the following aspects:
Cost of Working Capital Funds Cost of Working Capital Funds
This component represents the interest and other incidental charges payable by the Company for servicing the borrowed funds which are mobilised through loans and Non- Convertible Debentures (NCDs). Major components includes interest on bank borrowings, other incidental charges thereto and interest payable on Secured Non- Convertible Debentures.
Overhead costs Overhead Cost
Overhead costs comprises of employee cost, establishment costs such as charges for rent, electricity, water etc., security charges such as engagement of security guards, setting up of burglar alarms and CCTV cameras, insurance premium for insuring the gold security held in the custody of the Company etc., Statutory expenses, Marketing expenses etc.
Return on Capital Employed Fair return on Capital Employed
Fair return on capital is calculated as per industry standards and taking into account the interests of investors of the Company which is listed in stock exchange.
Market conditions Market conditions
Market conditions include the rate of interest charged for similar loans by Banks and NBFCs. Guidelines of Reserve Bank of India from time to time also shall be strictly followed. The Board shall take into consideration a fair return on capital employed which is to be generated by the management for servicing the owners capital employed in the business.
Thus the basic interest rate for the gold loan schemes shall be determined by considering the cost of working capital, overhead cost, fair return on capital employed and the market conditions.
Risk Interest Rate
Risk Interest shall be determined by taking into account the degree of credit risk involved in loans under each loan scheme. While the interest rate shall be the lowest for the schemes where advance amount vis-à-vis the weight of gold is the lowest, it shall be increased for schemes offering higher advance amount for the same weight. Further, irrespective of the scheme, the risk interest shall also be determined after taking into account the tenure period of the loan as the probability of risk incidents goes up with the passage of time. Risks in respect of gold loans includes the fall in price of gold, possibility of the gold pledged turning out to be spurious or of low purity on audit, stolen gold being pledged, delays in settling loans of deceased borrowers due to legal issues etc.
Effective Interest rates on gold loans vary depending upon the rebate offered for periodical remittance of the interest under each scheme, the principle being those who service the interest early gets a better rebate. For e.g., higher rebate is offered to those servicing interest within 30 days of disbursal as compared to 60 days, 90 days and so on. The rebate comes down and resultantly the interest rate goes up if interest is not serviced by the due date prescribed like 30/60/90 days etc. after availing the loan. The rebate is offered to encourage borrowers to service interest regularly within the prescribed slab periods and to avail the benefit of higher rebate and lower competitive interest rates. The rebate is only an offer and it is left to the choice of the borrower whether to avail the benefit or not. Company shall charge interest as per the terms and conditions of the loan mutually agreed to by the borrower who has signed the pledge form / loan agreement and accepted the other terms and conditions of the loan. For example if a scheme is offering a rebate of 12.1% on the interest rate of 24%.p.a., at which the loan is sanctioned, for servicing interest within 30 days, interest @ 11.9% only will be charged if interest is paid within 30 days from the date of sanction of the loan. However, if the customer does not service interest by 30 days after availing the loan, he will lose the advantage of the higher rebate and accordingly, the rebate rate will move to the next lower slab resulting in a corresponding higher interest rate being charged from the loan origination date and customer has to pay interest accordingly. It is the prerogative of the company to allow any concession based on merits when the interest rate changes as above.
Penal Interest Rate
Penal interest is charged as penalty for non-repayment of the loan dues within the contracted period of 365 days as per loan terms and also to compensate the possibility of a loss in the event of liability exceeding the realizable value of gold given as security. Penal interest will be levied by charging an additional rate of interest for the overdue period and hence will be subjected to compounding on a monthly basis after the loan becomes overdue. The higher rate will be charged on the balance outstanding as on the date when the account become overdue and from the date the loan has become overdue.
Method of Calculation of Interest
The interest shall be calculated for the actual number of days the loan remains outstanding, from the date of loan disbursement to the date of closure. However, if the borrower closes the loan within 7 days from the date of disbursement, then a minimum interest for 7 days shall be payable for gold loan schemes where the minimum effective interest rate is more than 11%. For gold loan schemes with minimum effective interest rate is 11% and below, then a minimum interest for 15 days shall be payable, if the borrower closes the loan within 15 days from the date of disbursement. If the amount of interest so calculated is less than Rs.50/- then a minimum interest of Rs.50/- will be charged. A rebate in interest rate may be provided for encouraging timely repayment of interest or closure of the loan on or before the specified tenor, as per different slabs built into each scheme.
The Company may, at its discretion allow grace period from the due dates as decided from time to time if the date for payment of interest falls due on a Holiday/Sunday.
For the purpose of calculation of interest, a year will be reckoned as 365 days. Interest is calculated at monthly compounding basis.
The full details of method of calculation of risk interest and penal interest shall be mentioned in the Fair Practices Code approved by the Board of Directors and be published in Company’s Web Site.
The rate of interest of applicable for each scheme and the rebate allowed on timely payment of interest under different slab periods (3 months, 6 months, 12 months) etc. are clearly mentioned in the pledge form as well as the sanction letter issued to the borrower.
Other Loan Schemes
We have recently introduced a few loan schemes other than gold loan schemes such as Personal Loan Scheme, Business Loans, SME Loan Scheme, Traders Loan Scheme and Corporate Loans. Interest and principal on these schemes are collected either on Equated Monthly Installments (EMI) basis or as monthly/quarterly instalments. The EMI consists of principal and interest portion and these are bifurcated and accounted when an EMI is received. As the principal loan outstanding will be higher in the initial period of a loan, interest portion in EMI will be higher in the initial period and later, the interest portion will be lower and principal portion will become higher. The appropriation of EMI amounts paid by borrower will accordingly be higher towards interest in the initial stages. For loans repayable in monthly/quarterly instalments, the periodicity of payment of interest will be specified in the loan agreement/sanction letter. Loans are also sanctioned mainly to subsidiaries etc., with periodical interest servicing but with repayment of principal in lump sum at the end of tenure of loan.
Interest rates will be fixed on the basis of risk assessment, cost of funds, cost of operations, fair return on capital employed, market conditions etc., and may it differ for different schemes and different categories of borrowers. Penal interest will be charged on default of EMIs. Processing charges as decided from time to time will be recovered.
A scoring model which captures the risk aspects connected with the exposure to a borrower is also used to decide the interest to be applied. The model takes into consideration the track record of the borrower obtained from Credit Information Companies like CIBIL, EQUIFAX etc. Borrowers with good credit score / rating in the reports of the above agencies are offered better interest rate. Borrowers with track record of default in their loans, loans falling under suit filed, settled or written off categories are not sanctioned loans while those with minor deviations or having lower Credit scores or “Nil” credit score due to no credit history available are sanctioned loans with a higher pricing. Taking into consideration the above aspects, interest in the band of 14% to 22% per annum is charged for personal loans.
Loans to Landlords
Unsecured loan up to 60 times the net monthly rent payable can be granted to owners of premises occupied by our branches / offices.
The loan is granted against rent payable by us to the landlords and the risk involved is low as there is assured payment of EMI every month directly towards the loan. The premises lease is generally for 15 years with scope for increase in rent after every three years. The loan to land lords are granted for maximum 7 years. Hence the risk of default is considered very less.
Considering the above, interest is levied between 18% p.a.to 19% p.a. The minimum rate of interest levied at present is at 18% which is applicable to borrowers who offer original of the property documents and interest at 19% is charged to borrowers who provide only copy of the property documents. Service Charges @1% of the loan amount is also collected.
Traders Loan Scheme
Traders Loan is granted preferably to existing gold loan customers for a period of 24 months and repayment is by way of 24 EMIs. Interest rate is decided based on cost of funds, risks and operational costs. Interest at 18% is charged on borrowers with CIBIL score above 700 and at 19% on borrowers having CIBIL score below 700. Service Charges @1% of the loan amount is also collected.
Loans to SME Sector
Interest rates will be fixed on the basis of risk assessment, cost of funds, cost of operations, fair return on capital employed, market conditions etc., and may differ for different schemes and different categories of borrowers. Terms of tie ups with Fintech Companies will have a direct impact on fixing the interest rates depending upon the model adopted.
A credit scoring model is used to capture various parameters connected with the proposal and borrower including the CIBIL or Equifax credit score of the borrower. Based on this, appropriate rate of interest within the range of 16% to 22% is decided, with the aim of weighted average rate of interest of 18%. This interest rate band is as per the SME Loan Policy approved by the Committee of Board authorized to approve new loan schemes. Any changes in interest rate will be with the approval of the Committee of Board.
Interest rate will vary and will go up or down within the band of 16% to 22%, depending upon whether the credit facility is secured by tangible securities or unsecured