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I HAVE GREAT PLEASURE IN PRESENTING TO YOU OUR 20TH ANNUAL REPORT FOR THE YEAR ENDED MARCH 31, 2012. OUR PERFORMANCE DURING THE YEAR, SEEN IN THE CONTEXT OF AN ECONOMIC SLOWDOWN, WAS QUITE SATISFACTORY. AT THE SAME TIME, AFTER THE RECENT YEARS OF RAPID GROWTH, WE ARE NOW MOVING INTO A PHASE OF CONSOLIDATION. WITH INDIA'S MACRO–ECONOMIC FUNDAMENTALS LOSING SHINE, AND UNCERTAINTIES EMERGING IN THE REGULATORY ENVIRONMENT, THIS IS A GOOD TIME TO RECHARGE AND RE–FOCUS.
The year 2011–12 saw the global economy lose traction once again, n the wake of a deepening Eurozone crisis. Barring Germany, most EU countries are faced with slow growth, even recession, along with unsustainably high levels of debt. The crisis has impacted India too, with the overall risk–averse sentiment crippling the flow of foreign Investment. Besides, our exports to Europe have fallen, aggravating our trade deficit.
Undoubtedly, India's macro–economic landscape also took a turn for the worse. Contrary to the optimism that reigned at the beginning of the year, GDP growth was restricted to a mere 6.5%, belying expectations of much higher growth. The slowdown had an adverse impact on the government's finances, with revenues falling short while the expenditure side overshot the estimates on account of higher fuel and food subsidies. The country's fiscal deficit moved into the danger zone at 5.8% of the GDP.
Inflationary pressures remained high for much of the year, occasionally flirting with the double digit mark. India's current account deficit stood at 3.9% of the GDP largely due to a record trade deficit of US$ 185 billion with imports of oil and gold leading the way. With the economy slowing down and corporate profitability under strain, stock markets were down and inflows of foreign investments were muted. This has put the Indian rupee under severe pressure, which fell from levels of Rs. 45 per US$ in July, 2011 to a low of about Rs. 54 per US$ in December 2011. Some amount of moderation in inflation was seen in the final quarter, which encouraged the RBI to go ahead with a 50–basis point cut in interest rates in April 2012, after 13 successive rounds of hikes in interest rates.
The outlook for the coming fiscal (2012–13) is mixed, at best. While government sources would have us believe that a recovery in growth is on the cards, the market expectations are generally not positive.
GOLD LOANS SECTOR
For the gold loans sector, 2011–12 began well with the leading gold loan NBFCs reporting continuing gains in volumes and market shares. However, in the final quarter of the year, the sector ran into headwinds, with the Reserve Bank of India (RBI) intervening strongly to address perceived risks building up in the financial system on account of increasing exposure to gold loan companies. It may be recalled that RBI's tightening had actually begun in, February 2011, with a notification that denied priority sector status to any finance extended by the banking sector to the gold loan NBFCs. It had the impact of raising the borrowing costs of the gold loan NBFCs by about two percentage points. This year, on March 21, the RBI imposed a cap on the loan to value (LTV) ratio for NBFCs at 60% of the value of collateral. RBI's concern is that the rapid growth of gold loan companies, along with a dependence on public funds, poses a systemic risk. Further, there was concern about concentration risks n the gold loan NBFCs, arising from their single–product focus.
While the market has interpreted RBIs stance as being negative to the gold loans sector, as insiders in the industry, we hold a different view. Indeed, we are convinced that the RBI has acted out of its key responsibility to prevent critical risks from materialising. At the same time, we also believe that gold loans can be a transformative force in India's financial sector, particularly in promoting financial inclusion and in monetising India's vast stock of private gold. Therefore, it's imperative that we do not lose sight of the significant upside potential that gold loans hold. By restricting the LTV to 60% and making it applicable only to the NBFCs, there is a real risk of breathing new life into the unorganised sector (local pawnbrokers and moneylenders), and of stifling the original innovators in the business. However, we expect the RBI to continue to keep a close watch on the evolving situation and recalibrate its policy responses as required. The fact that they have now constituted a working group, led by Shri K.U.B. Rao, to study the business of gold loans is a positive step in this direction, and we are hopeful of a favourable outcome.
WIDER RELEVANCE OF GOLD LOANS
Ultimately, the true test of sustainability of a business is not the returns to promoters and shareholders, but how much of value flows back into the society. On this count, India owes a debt to its gold oan NBFCs. Gold kept idle in our lockers and vaults is a drag on the economy because it keeps billions of dollars in savings out of the financial system. Gold loans generate economic activity out of an unproductive asset. Thanks to the momentum given by the gold loan NBFCs, a host of new players have entered the business and we can expect more of our idle gold put to productive use. Incidentally, the Indian government's own efforts to monetise private gold, notably through the Gold Bond and the Gold Deposit schemes, were failures.
Financial inclusion is a national priority, and gold loans can be a useful tool in achieving this objective. Unlike other indicators of wealth, the larger part of India's private gold (about 65%) is held by rural India. The poorer households own gold in significant measure, as part of their savings. In a context, where the economically challenged and the financially excluded Indian households are known to possess gold in some measure, gold loans represent the prudent way forward. What's more, these gains are delivered even as disadvantaged borrowers pay less interest on their borrowings than before. An unintended consequence of the expansion of the gold oans NBFCs has been that unregulated local financiers are forced to drop their interest rates in response to the increased competition. Not surprisingly, we believe there's every reason to be optimistic about the long–term future of India's gold loan sector.
In keeping with the trend of recent years, your Company's performance in the year under review was, by all measures, remarkable. Net profit for the financial year ended March 31, 2012 increased by 109% to Rs.5,914.6 million, compared to Rs. 2,826.6 million for 2010–11. There was substantial growth in Assets under Management (AUM) which stood at Rs. 116,308 million, a 54% increase over the previous year's level of Rs. 75,491 million. Total gold loan disbursements during the year amounted to a staggering Rs. 316,982 million, against t 180,569 million in the previous year. Operating income for the year grew 124.43% and stood at Rs. 26,155.5 million. Importantly, you can be proud that your Company is a leading tax payer of Kerala, with provision towards income tax amounting to Rs. 2,857.5 million, compared to Rs. 1,412.3 million the year before. You will also be pleased to know that the Board of Directors has proposed a final dividend of Rs. 1 per share of face value of Rs. 2, over and above the interim dividend of Rs. 0.50 per share declared earlier this year.
In February, 2012, the RBI had issued a public notice that censured the Company for continuing to accept deposits from the public after becoming a non–deposit taking NBFC in March, 2011. While we have clarified that the Company was accepting retail subscriptions to its secured NCDs (which is permitted), a related issue had also come up regarding deposits accepted by a proprietary concern owned by me in my personal capacity. In the light of the concerns expressed by RBI, I have since transferred the entire amount of these deposits into an escrow account with a local nationalised bank, and the bulk of the deposits have now been repaid.
Arising from these developments, the top management of the Company initiated a series of measures to review and improve governance standards, and benchmark it to best practices. The eading law firm of Amarchand Mangaldas was taken on board to assist with the review exercise, and we are now in the process of implementing their recommendations.
Lastly, I am indebted to all our stakeholdersthe distinguished shareholders, employees, our lending banks and financial institutions, our foreign and domestic investors, the regulatory bodies and the governmentfor their valuable contributions in our success. I must make a special mention of the Reserve Bank of India, which has devoted considerable time and resources to ensure the security of the financial services sector and the long–term survival of the gold loan sector. I mentioned at the beginning that we are now in a phase of consolidation. By definition, consolidation is not half as exciting as rapid growth; nevertheless, over the long haul, t is vital for the health of the organisation. I seek your whole–hearted support, so that the Company is able to achieve its true potential in the years to come.
With best wishes,