1

Research Objective and Research Data

Objective The objective of the research is to get an understanding of the business of Loan against Gold in India. The research involves a study of the various players in the Loan against Gold business in terms of their operations, volumes, profitability and the comparison on the said parameters amongst the various players. However, for the purpose of benchmarking, one player (i.e. Future Money) in the business will be comparison with the rest in terms of profitability. Scope Branch Profitability study includes analysis of the various costs/expenses that a branch has to incur in conduct of the Gold loan business. The costs include both fixed and variable cost and the cost of raising the funds. The profitability of the branches differs due to factors like location, competition, products and services offered, etc.
A detailed analysis of the profitability parameters will be done in the research study with respect to branches of Future Money providing Gold Loan services. This analysis will be benchmarked with the more established players like Mannappuram Finance and Muthoot Finance. The report will also provide suggestions, recommendations, ways that could improve the profitability of the branches of Future Money.

Data The research will include a study of the Loan against Gold business of Future Money, Manappurram Finance and Muthoot Finance. The data for the study will be gathered from primary and secondary sources. The primary data for the same will be collected by visiting the branches of various players in the business and the secondary data will be collected from the websites which will include the financial data, sales data, branch locations, etc.

Acknowledgement
A project usually falls short of its expectation unless guided by the right person at the right time. This project would not have completed without the direct or indirect help and guidance of luminaries at Future Capital Holdings. They provided me with the necessary resources and an environment conducive for healthy learning and training. They provided me with the required amount of freedom to exercise my skill under the able guidance. I, Mr.Nilesh B. Shingade would like to take this opportunity to extend my gratitude to all those who helped me in presenting this project report. Their contribution no matter big or small has contributed immensely towards completion of this project. Firstly, I would like to thank Future Capital Holdings, for giving me this opportunity to undertake a project with their prestigious organization. A special thanks to Mr. Mukesh Dedia,Mr. Rishabh Agrawal (AVP, Sales, Mumbai) and Mr. Arindam Das (VP, Sales) for being my mentor and guiding me throughout my project. Without the critical evaluation and the suggestion given to me at every stage of the project, this report could never have reached its present form. Last, but not the least, I would like to thank my parents and God for always being there, as a strong support. I would like to express my gratitude to my college for allowing me to do this project with sufficient time. Its all together a lifetime experience to be a part of Future Capital Holdings as a Management Trainee.

INDEX

Topics 1. LOAN AGAISNT GOLD 2. Company Profile 3. Loan against Gold at FCFSL 4. Branch Costing For Loan against Gold
5. Interest Calculation on Loan 6. Break Even & Profit Projections 35

Page No. 6 8 13 28
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7. Comparison with Existing Players 8. Risk Management

38 44

1. LOAN AGAISNT GOLD

To avail any kind of loan from a financial institution, the borrower needs to offer collateral which is a kind of a security to the lending institution. The security safeguards the lender in case the borrower defaults. The security is the one which must be owned by the borrower and should have a monetary value. An individual may avail a loan for fulfilling his diverse needs. The various kinds of loan that are offered by the players in the loan business are as follows: Auto Loan Home Loan Personal Loan Loan Against Property Loan Against Security Loan Against Gold One of the products in this category is Loan against Gold. The product involves offering loan against the security of gold ornaments/coins. For Indians, gold is considered as an essential investment from a cultural, emotional and safety perspective. Once bought, it is a dead investment. It tends to lie in the locker without earning any money. One can monetize this idle asset to help tide over ones financial need. Gold is a valuable commodity. Even though the market value of gold is often fluctuating, generally an upward trend is maintained. Gold satisfies all the tests of good security viz. marketability, ascertainability, stability and transferability. So, loans against pledge of gold ornaments are considered to be safe, liquid and remunerative Gold loans are not new to the Indian market. It existed but in the unorganized sector where money lenders used gold as a security for providing loans. Lately, Banks/NBFCs have entered into the gold loan business in a big way because the market is very large considering the fact that most Indians tend to have sufficient investment in gold. Off late, this product has become popular because of the substantial rise in the gold prices. The quantum of loan that one can get by keeping gold as security has increased tremendously making it an attractive loan proposition.

Features of Gold Loan: Secured Loan: Gold Loan is essentially borrowings against the security i.e. gold. The loan is to be availed only if an individual is sure that the loan would be repaid or else he/she may end up losing the gold. Tenure: Gold loans are typically for duration of 3 to 12 months. They are thus best used to fund short term monetary requirements. No end use restrictions: The loan can be taken for any purpose so long as the money is not being used for speculative purposes Loan amount: In most cases, the maximum loan value is not more than 80% of the value of gold. Most banks deal in relatively higher loan amounts. NBFCs on the other hand, deal in small value loans Interest Rate: The interest rate charged by banks can be in the range of 11.5% and 15%. Banks usually charge a processing fee while NBFCs may not charge the same. The rate of interest charged by NBFCs is much higher as compared to banks. Repayment: The loan can be foreclosed at any time without any penalty. In case of irregular payment of EMIs, a penal interest of up to 2% is charged by banks. Market risk: The lender retains the exposure to the market risk arising from movements in the market price of gold Why Gold Loan? Quick processing: Gold loans require minimum documentation and hence it can be resorted to in times of urgent need. Banks maintain that it takes a few hours to get a gold loan and some NBFCs state that it takes only a few minutes. More attractive than a personal loan: The rate of interest charged on gold loans tends to be much lower than that of a personal loan. Therefore, it may be worthwhile putting you asset to work and thus reducing your cost of loan. Emotional attachment will ensure timely payment: Most families have an emotional attachment to gold and that will make you morally responsible to repay the loan in time so that you can get back the gold that you had placed as a security Cash flow management: In a typical loan against gold transaction, only interest needs to be paid during the tenure of the loan and the principal amount has to be repaid at the end of the tenure. This allows customers the borrower to manage cash flows better.

2. Company Profile
PROFILE Future Capital Holdings (FCH) is a provider of financial services across wholesale and consumer businesses, with aspirations to grow into a significant financial conglomerate. It has a unique positioning of a financial services business, integrated with a retail chain. FCH is building financial superstores within the Retail Stores of Pantaloons Retail India Limited to create Indias first consumer-centric retailer of financial products and services. Vision: To develop a unique positioning of a financial services business, integrated with a retail chain, for ease of distribution & access to customers. To grow into a significant financial conglomerate, & provide financial services across wholesale and consumer businesses, including Asset Management, Wealth Management & Equity broking. To capitalize on the growing consumption in India, which is a key driver of the Indian economy. To be a preferred partner in helping our clients succeed in the rapidly evolving financial markets by providing innovative product solutions, high level of convenience & service supported by robust technology.

Lines of Business:

FUTURE CAPITAL HOLDINGS

Retail Financial Services

Wholesale Credit

Consumer Durable Loans

Loan against Security

Loan against Property

Loan against Gold

I. Retail Financial Services (RFS): FCHs strong due diligence capabilities across asset classes - private equity, real estate and special situations - allow it to appropriately analyze risk. Revenues from RFS, for year ended 31st March 2010 stood at Rs.1,074 million with a profit of Rs.191 million. The strategy to focus on appropriate product mix, enhanced efficiency in collections, along with improved risk management processes has helped this business to turn the corner. The Company has identified this as a natural growth avenue due to the large footprint it enjoys through its group affiliates. Product offering in protection and credit widened through new tie ups with leading financial brands. With the help of new systems & technology along with Transunion, credit approvals became faster thereby reducing the disbursal lead time. Companys participation in retail portfolio buyouts on opportunistic basis has contributed significantly. Retail portfolio buyout book stood at Rs.3,640 million on the year end. We will continue to exploit such opportunities with strong first loss coverage from the originators. Going forward the Company shall focus on leveraging groups retail footprint on one hand and earn higher risk adjusted returns through secured lending i.e., asset backed lending mainly into home equity and consumption loans.

1. Consumer Durable Loans: FCH has built an excellent platform for financing the customers purchases of consumer durables like refrigerator, air-conditioner, furniture etc. from stores of Pantaloons Retail India Limited. 2. Loan against Property: FCH also provides Loan against Property. These loans are typically availed by Small and Medium Enterprises, and funds are typically used for investment in their businesses. These loans provide liquidity against valuable physical assets of the customers. 3. Loan against securities: Loans/Overdraft facility is provided to individuals against listed liquid shares for 3 12 months for meeting short term needs, as well as to employees for funding their ESOPs. These are typically taken by customers to tide over short term liquidity issues by taking loan against the shares, without selling them. 4.Loan against Gold: These loans help the customers to unlock the value of their gold usually in the form of jewellery, to avail of funds. Customers usually take these loans for a period of 3-12 months. II. Wholesale Credit FCH offers wholesale credit solutions to the customers in the corporate world, specializing in mezzanine, promoter, project and acquisition financing, and other special situations related financing. Financial Performance Future Capital Holdings standalone net profit after tax grew by 86% to Rs.173 million for the year ended 31st March 2010 93 million for the year ended 31st March 2009. FCHs consolidated income has grown by 35% to Rs. 2517 million for the year ended 31st March 2010 from Rs.1869 million for the year ended 31st March 2009. The consolidated net profit after tax grew to Rs. 593 million for the year ended 31st March 2010 from Rs. (321) million for the year ended 31st March 2009. the fully diluted EPS on consolidated basis is Rs.9.25.

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Revenue from retail credit business, for the year ended 31st Marsh 2010, were Rs.1074 million with a profit of Rs.191 million. The strategy to focus on appropriate product mix, enhanced this efficiency in collection, along with improved risk management processes has helped the retail credit business to turn the corner. The company identified this as a natural growth avenue due to the large footprint it enjoys through its group affiliate. The company focus will be on leveraging this retail footprint on one hand and earn higher risk adjusted return through secured lending i.e. asset backed securities lending mainly into home equity and consumption loan. FCH Corporate lending & wholesale credit business has performed well during year grossing revenues of Rs.600 million for the year ended 31st March 2010. This business includes promoter and project financing, acquisition funding, secured lending and other special situation related to financing. It has a loan book of Rs.7390 million for the year ended 31st March 2010. The strong due diligence and credit evaluation capabilities across asset classes, and synergies with the Future Group gives the company a competitive edge in the industry. Achievements The company achieved the highest credit rating during the year for its short term borrowing programme of 6000 mn, thereby leading to substantial saving in interest costs. Company was able to reduce the blended average cost of funds by 200bps.

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Organization Structure

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3. Loan against Gold at FCFSL

Product Norms Loan is provided against gold as collateral. The loan is offered to salaried and self employed individuals. However, the loan is not offered to individuals having a negative profile. Negative Profile here means: Employees / owners of companies in the RBI list of defaulters Employees / owners of companies blacklisted by the Risk Containment Unit

The term Negative Profile is only an indicative term. On the other hand, prior approval of Policy/Risk team is required before providing loan to lawyers and policemen. Maximum and minimum Loan Amount The minimum amount of loan offered is Rs.7500/- and the maximum amount can be upto Rs.2500000/-. In case of loan to a group (i.e. Group Exposure) the maximum amount of loan offered can be Rs.5000000/-. Here, a group means a family comprising of members specifically father, mother, daughter, son and daughter in law. Tenor The tenor of the loan can be 3 to 12 months. Age The minimum age of the applicant should be 21 years at disbursement and the maximum can be upto 75 years at maturity (For Self Employed/salaried) Security The security to be provided by the customer is Gold. However, there are few aspects that are looked into by the company before accepting gold as collateral. They are: Gold Ornaments pledged should be in the range of 20-24 carat. Only pure gold ornaments are accepted.

Approval from the Policy/Risk team is needed for accepting Gold ornaments with precious stones as collateral. On the other hand, gold biscuits are not accepted as security.

Valuation of Gold 13

The gold is valued by two appraisers viz, In- house and External appraisers. The amount of loan offered against collateral is generally upto 80% of the value of gold. 20% is nothing but the Hair cut discounting which is done on the net value of gold. Hair Cut is the discounting factor on the market rate to protect against the volatility in gold price. The Hair cut margins are published by the policy team on a periodic basis based on the volatility in gold prices. The frequency of publishing the rate depends on the gold rate volatility, it is published usually on a monthly basis. However, any drop on a cumulative basis post the latest price update beyond 10% will trigger an interim revaluation and application of the new rate for prospective loans. The value of Gold is determined on the basis of the gold weight and carat as determined by the appraiser and the prevailing gold rate as circulated by product and policy team. The least of valuations done by the two appraisers needs to be considered for loan purpose. All cases where the difference in valuation is more than 10% is reported to corporate team. Reference Check A personal interview of the applicant is conducted by the loan Officer before disbursal of the loan. This is mandatory clause. However, no CIBIL check of the customer is done. At the time of personal interview, Digital photographs of the applicant along with gold being pledged is taken and the same is matched with the gold at the time of depledging. Photo of the applicant along with gold being depledged is also taken at the time of depledging.

Repayment Options Two options are available to the customer for repayment of loan. They are: Interest Only- In this option, the interest is charged on the amount outstanding. The interest is paid on a timely basis whereas the principal amount is re-paid at the end of the tenor. EMI- The amount paid comprises of interest and principal component.

Disbursement of Loan 14

The disbursement of loan is done by Cash, Cheque, Demand Draft or through the RTGS/NEFT system. The loan can be disbursed in cash for amount upto 10 lakhs. However, for cash disbursal above 3 lakhs, approval is needed. Disbursal above 10 lakhs is done through a cheque, Demand Draft or by RTGS/NEFT. Customer Credential verification The credential of the customer are checked against the FCFSL dedupe system. Tele- Verification (TVR) is done for all the cases to establish contactibility and to check whether the applicant stays or works at a given address. In all cases one of the last three months bills of the number on which Residence TVR has been done and is positive should be kept in records. If the same is not available then the Residence CPV is needed to be carried out. TVR can be done on Landline/Mobile/Wireless Landline phone. In case of TVR applicant not spoken to but stay or employment confirmed is to be taken as positive TVR. Interest Rate The interest rate is determined by the product team and the same is circulated at the branches on a monthly basis. The rate of interest is generally in the range 1% to 2.5%.

Branch structure 15

Branch Manager

Customer Care Executive

Valuer

The above is the structure of the branch at Future money. In all, there will be three to four people at the branch servicing the customers. Branch Manager is the custodian of gold and cash at vault. He is the loan sanctioning authority and does all the credit checks. There is a In- house valuer who tests the gold that is offered by the customer and determines its value. He would handle other functions like handling of collateral and acceptance of the same, loan disbursement and closure along with logistics for storage & retrieval. The Customer Service Executive assesses the credentials of the customer, conducts his interview and assists him in availing the loan in terms of documentation and other loan formalities. There is security guard appointed at each branch level. In addition to the above, there is an Area Sales Manager who looks after the marketing aspect which includes promotional activities, establishing contacts with the jewellers in the area. Areas generally include more than one branch.

Process Flow
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At Branch Level

As mentioned in the Branch Structure part above, there are in all three people who are actively involved in the Gold Loan Disbursal Process.

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The following is the Process Flow from the stage of enquiry till the repayment of loan by the customer. 1) Inquiry and Valuation of Gold Information is provided about the products to the customer. Gold to be pledged is tested by the in- house valuer and the loan amount that can be provided is arrived at. The same is communicated to the customer. Customer has to fill the application form, submit the documents and the same is verified against the original documents The documents collected are put under OSV seal. A Personal interview of the customer is conducted by the customer care executive to find the authentication of ownership of gold. Some basic questions that are asked are: When were the ornaments bought? For what amount were the ornaments bought? Have the ornaments been pledged with any other financier before? Who had purchased the ornaments?

Details of the collateral are to be recorded in an appraisal format which is nothing but a document containing a brief description of the collateral that is given for valuation. The appraisal format has to be duly signed by the customer. Subsequently, digital photographs of the customer are to be taken.

Valuation Process The following aspects are looked into while valuing the ornaments: The valuation of gold ornaments is based on the weight and fineness of the gold contents. The weight of all extraneous matter such as wax, strings, and non-gold fastenings, precious and semi-precious stones etc, is deducted on a liberal scale. Typically, in any gold ornament, at least 15% by weight would be non-gold joints. Thus as a guideline, gold weight is generally not be more than 85% of the weight of the ornament. The final decision of deducting the weight of the extraneous matter will be with the appraiser. Utmost care is taken by the appraiser to see that the ornaments are not spurious. This is particularity true while dealing with solid gold items (like kadas), which could be filled with another metal inside. After all the above, the appraiser arrives at the actual value of the ornament that is intended to be kept as collateral.

2)Loan Documentation

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The customer needs to fill the requisite documents (viz. Application Form, Appraisal Form, Approval Form, DPN, TAG) for availing the loan. Signature of the customer on all documents is taken. Subsequently, it should be signed by the Branch Manager. The ornament to be kept in a pouch. The pouch is closed by the valuer in presence of the customer and the Branch Manager.

3) Disbursement of Loan All completion of all the formalities, the loan amount is given to the customer. A Token Card is issued which has the details of the customer LOS APP ID.

4) Document Filing and storage of Gold All the documents to be scanned. The documents are to be uploaded on the LOS (Loan Originating and Repayment management System). LOS is software used for recording the transactions. All documents to be sent to the COPS except TAG & Token card, Digital Images and Inventory cum Appraiser Certificate.

5) Collection of Monthly Interest/EMI Payment made towards EMI/Monthly Interest is collected and the same are recorded. If the loan is not repaid on the due date of repayment, the penal / overdue interest (at the rate prescribed by product) would be charged for the period that the account is in excess. If the customer does not pay the amount due, reminders are sent to the customer. On non-payment even after reminders sent, notice of auction to be sent to the customer. Pledged gold to be auctioned.

6)Full And Final Payment and Release of Security At the end of the tenure, principal amount of the loan with the interest due is received. The customer has to submit the Gold Loan Token Card given to him, at the time of account opening. The amount of interest and principal amount due to be paid is arrived at by the Customer Care Executive. The same is manually checked. After determining the amount due, the customer is requested to make the payment. The security pledged is released, the date and time when te security will be handed over to the customer is communicated. 19

On the said date, the customer takes back his security after verification. All the transactions over the period are stored for future reference.

At Operation Level (Central) At FCFSL, there is a central operations unit functioning at Noida. It looks after the operations aspect on a PAN India Basis. It looks into all kinds of loan disbursal provided by the branches of FCFSL across the country viz. Loan against Gold, Loan against Property, Auto Loan and Loan against Security. The basic function of the operations unit is to provide authorization to the loan cases that are disbursed to customers. When a loan is disbursed to the customer, he has to submit various documents like identity proof, residential proof, PAN Card/Driving License/Passport etc. At the same time he has to fill in documents like Loan Approval Sheet, Appraisal Form, KYC Form, Loan Agreement, to name a few. All the documents pertaining to the customer are to be scanned on the LOS system and should be sent to the operations unit on the same day of the disbursal. The operations unit meticulously checks in all the documents pertaining to each disbursal and informs the respective branch in case of any shortcomings in the procedural process. If all the documents sent are as per requirements, the central operations team authorizes the proposal. Other function of the Central team includes: Appointment of appraisers Termination of appraisers services Investigation of valuation differences highlighted during dual appraisal and taking corrective actions as appropriate. Maintaining an MIS to ensure that no outstanding loan is overdue or the Loan to Value cap is breached.

Testing of Gold
About Gold Karat 20

Gold Karat determines the purity of gold in an ornament. 24 karat gold means pure gold, but it also means that it is more expensive and less durable than gold that is alloyed with other metals. Different alloys are used in jewellery for greater strength, durability and color range. The karatage of jewellery indicates the percentage of gold that jewellery comprises. The following table represents the percentage and the karatage relationship in gold jewellery. 1 Karat 6 Karat 8 Karat 12 Karat 14 Karat 18 Karat 22 Karat 24 Karat KARAT AND PERCENTAGE Equals 4.167 Equals 25 Equals 33.33 Equals 50 Equals 58.33 Equals 75 Equals 91.96 Equals 100

While buying gold jewellry, one must look at the karat mark or k that appears on the back piece of the gold jewellery. All other things being equal, the higher the karatage, the more expensive the gold. Types of Gold There are different types of gold. Viz Gold Filled, Gold Plate and Gold Leaf. Gold Filled refers to a layer of atleast 10 karat gold that has been permanently bonded by heat and pressure to one or more surfaces of the support metal, then rolled or drawn back to a prescribed thickness. The karat gold must be atleast 1/10 of the total weight of gold. Gold Plate means that a layer of plating of 10 karat gold or better has been bonded to a base metal. The karat gold content may be less than 1/20, but it must be properly identified by weight in terms of total metal content. Gold Leaf is just gold plating thats been pounded and applied by hand. Gold Colors Gold colors can be in three colors. They are as follows: Yellow Gold White Gold Rose Gold

Yellow gold is an alloy of silver and copper. This type of gold is generally used in jewellery. The features of this type of gold are that it is malleable, ductile, noncorrosive and it as a high melting point. 21

White gold is alloyed with a large percentage of silver, or a selection of other white metals. The percentage of gold varies, according to the amount of other metal used. White gold is highly reflective and not subject to tarnish. Rose gold is alloyed with copper, and perhaps silver. The proportion is about one part of copper to three parts of 24 karat gold. Gold Pricing The pricing of gold is based on a number of factors, including karatage, gram weight, design and craftsmanship. The karatage and gram weight tells about how much gold is in a piece, but they are not the only factors that determine the price of gold. Other factors determining the price include the construction and the design of the jewellery. Procedure of Testing of Gold A jewellery that is stamped as 10k, 14k or 18k may not be the actual content of gold. Sometimes a lower quality of gold will be stamped with a higher grade marking, it may be a possibility that it may not be gold at all; it may be a plated item. Hence, in order to check the actual quality of gold, testing needs to be done. The following materials and tools are needed to test the karat value of gold: Black Acid testing stone Acids Gold testing needles with gold tips used for comparison with test pieces

Testing for 10k, 12k, 14k The gold piece needs to scratched on the stone for testing. Next to this position, the appropriate needle needs to be scratched. Then a drop of the appropriate acid is to be placed on the stone where the gold was rubbed off. If the gold is of the same karat or higher, the color of the scratch mark for the gold piece will appear the same as the mark from the needle. If that gold piece is a lower karat, the scratched deposit will become fainter and eventually disappear. Testing for 18k The gold piece needs to scratched on the stone for testing and the 18k acid is to be applied. Any gold that is less than 18k will disappear in less than 30 seconds. Gold that remains on the stone is gold of 18k or higher.

Testing for 20k & 24k

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The gold piece needs to scratched on the stone for testing. Then scratch any item of known karat (coin or needle) on the stone. Apply one drop of acid to area. The material that starts to disappear first has the lower karat. Documentation The formats that are used at various stages by different people are: Documents that are to be filled by the customer at the time include Demand Promissory Note (DPN) Know Your client form Loan Agreement Letter of Pledge Declaration of Ownership of Ornaments Cash receipt (which is taken from the customer after cash is received by him) Inventory Sheet

Documents that are to be filled by the Valuer Appraisal format (Signature of the customer to be taken) Inventory cum Appraisal Certificate (Issued by Valuer)

Documents that are to be filled by the Branch Head Loan Approval Sheet Key Register

Documents that are to be filled by the Customer Service Executive Interview Sheet Token Card

AUCTION PROCESS 23

On non-payment of dues by the customer and repeated reminders sent to him with respect to it, a notice of auction of security is sent to him. Eventually, the security is auctioned. The auction process would take place 3 months after the due date has passed. The following process is undertaken so that the customer can avoid default. On the 7th day after the due date, a Reminder would have to be sent via Registered Post to the defaulting customer. One month after the due date, a Notice of Reminder would have to be sent by Registered Post cautioning him that the jewellery would be sold in case the borrower does not repay the amount. 3 months after the due date, a final notice would be issued in the local news paper to the customer giving the date, time, and location etc of the auction.

Finally, the auction process is held. The Risk/Policy/Business Head/ Operations Head manage the proceedings of the auction. They have to ensure the following: The principles governing the public auction are adhered to. Adequate care is to be taken to prevent the bidders from forming a ring / group and to ensure free and fair auction. In case there is a suspicion of formation of a ring by the bidders or that the final bid is not a fair price for the security auctioned, the auction proceedings may be postponed / cancelled after due intimation to all the parties present. The pledger (borrower / customer) of the gold ornaments is entitled to redeem the same at any time before the securities are finally knocked down in auction. Provided he clears all the dues to the bank. All papers connected with the auction proceedings such as the copy of registered notice issued to the borrower, auction sale notice, news paper publication, attendance of bidders etc is to be kept on record for future reference. Minimum Bid Price for auction of gold needs to be determined before the auction starts. The following costs need to be included: o Charges towards conducting the auction including notices in news paper, regulatory charges, (If any) eg. In certain locations sale of gold through auction entails certain charges towards sales tax etc. o Interest amount o Principal amount Central team should ensure that the seal in intact when they take the custody of the Jewellery. Incase any evidence of tampering is found, the box is to be opened in the presence of the Appraiser / s, Operations Officer and Loan Officer. The contents would be verified and re-appraised. Also, the matter would be referred to the Risk Containment Unit for further investigation.

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After the auction is completed and the money recovered from the purchaser, the amount received will be adjusted in the manner specified below: o Charges towards conducting auction, including notices in newspapers etc. o Interest repayment o Principal amount Balance if any after appropriating the charges as above is to be be given to the borrower or legal heir by issuing a cheque / draft in favour of the borrower. Since this is a pledge it is not necessary to go through the court for any part of the auction process. If there is no bid above the Minimum Bid Price, another auction is conducted where the jewellery would be sold at the highest bid price. The balance amount [Principal (+) Interest (+) Charges for conducting the auction (-) Amount realized from auction] would be recoverable from the borrower. Future Money / Future Money employee would not be allowed to participate in the auctions.

Audit
An auditor is appointed at a regional level who conducts an audit of the all the branches in that region. The person who conducts the audit is the External Empanelled Appraiser. At FCFSL, valuation of gold is done by two valuers. One is the In-house valuer who is an employee of FCFSL and other is the External appraiser. The auditing of the branches is done after an interval of 15 days. The auditor inspects all the transactions that have taken place during the period. He checks the documents with respect to each transaction, the collateral that was accepted, the valuation of the collateral, the entries that were passed for each loan disbursal case. After inspection, he issues a certificate stating the authenticity of the statements, transactions that took place during the period for which the audit was done. The certificate so issued by him is to be documented centrally.

Procedure for Handling of Exceptional cases

Full and Final repayment by legal heir of borrower In the event of death of borrower, the security i.e. Gold ornaments can be released only to the legal heirs as under: The legal heirs of the deceased borrower have to submit the necessary claim papers (Death Certificate & the Succession Certificate or Will) to the branch. These papers need to be vetted by the Legal team before any further action is taken.

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 On receipt and verification of the claim papers and on payment of outstanding loan and interest, the approval is obtained for the release of jewellery to the legal heirs. If there is more than one legal heir, they would have to nominate one legal heir for collection of ornaments and to pay the money. A letter specifying this would be required from all the heirs jointly. A letter of indemnity is taken from the appointed legal heir. The ornaments would be released to the appointed legal heir on the payment being made by him in full settlement of the account. A remark to the effect that the gold ornaments have been released to the appointed legal heirs is to be noted in the system. The signature of the appointed legal heirs is taken on the FMs token card copy and it would be verified with that of the claim papers. The process of removing ornaments, handling over the ornaments etc is the same which is followed if the repayment is made by the borrower. The claim papers are couriered to COPS. Dispute regarding gold / ornaments during repayment: In case when the ornaments are being returned to the customer and there is a dispute that arises regarding the quantity of ornaments, weigh of ornaments, etc. the ornaments must be placed in the safe custody of the operations team as soon as possible after verification by customer. The Valuer and appraiser Branch Manager should answer all queries raised by the customer and try to resolve the matter amicably. Incase the problem is not solved then the Corporate Office team / Collections team needs to be informed about the same for necessary action at their end.

Procedure incase of loss of Token Card In case the applicant has lost his Token Card, the following procedure is to be followed: Applicant has to provide a valid identity proof and signature verification. Same is to be compared with the photograph and signature on FMs copy of the Token card. Applicant has to sign an indemnity form (As vetted by FM legal team) indemnifying FM from losses suffered on account of release of ornaments to the wrong person. The box containing the pouched ornaments will be handed over to Operations officer and Hand over Certificate will be signed and taken on records by the loan officer. The box containing pouched ornaments will be handed over to operations officer and hands off sheet will be signed & taken on records. The Inventory Cum Appraiser Certificate is taken back from the customer. 26

 The customer is also handed over the Gold Loan token Card (customer copy). The Loan Officer CSE should file the Inventory cum Appraiser Certificate. Partial repayment (Allowed only in case of Loan to Value Breach) The customer identifies himself with the Gold Loan Token Card (Customer copy) given at the time of opening the account. The CCE verifies the token with the help of the LOS APP ID. The customer makes the payment and a receipt is issued once the amount is received. After the receipt of the amount, the details of the payment are filled in the Token Card and given back to the customer. The customers signature also needs to be taken on the same. Payment by way of a cheque is also accepted but in such cases the receipt is issued only after the realization of the cheque. The part payment can be made by anyone. It is not necessary that the borrower himself / herself be present. Incase of partial payment a new token card will be issued which will be updated in the system also. Signature on indemnity bound is to be tallied with signature verification and FCFSLs copy of the Token Card. After the Loan Officer has satisfied himself on the identity of the applicant, payment to be accepted and ornaments released (in case of complete repayment). In case of partial repayment, a new Token Card is to be issued to the customer. Same to be marked and noted in the system and on the FCFSLs copy of the Token Card that a new token card has been issued.

27

4. Branch Costing For Loan against Gold

For a branch to be functional, there are various expenses that have to be incurred. This includes the establishment expenses and the expenses that are required for day-to-day operations of a branch. The basis reasons for undertaking the Costing exercise for any branch is to determine the net expenses that will be incurred. On that basis, an estimate of profitability is arrived at in terms of when the branch will achieve its Break- Even considering the business and other related factors. The focus of profitability measurement is to find out the return on assets and return on equity. Branch Costing includes the costing of the branch with respect to the above expenses. i.e Establishment and Operational Expenses and comparison of the same with the incomes. Expenses The capital expenditure for opening a branch includes following expenses that needs to be incurred: Purchase of Computers Printers, Scanners, Telephone and CCTV camera, Alarm, Fake Note Detector Machine and Web Cam. Purchase of Furniture. Viz. Chairs, Cupboards etc Purchase of Safety Vault, Weighing Scale, Hand Safe and Appraising Kit Expense related to registration, obtaining of license. Expenses related to infrastructure, interior development charges.

The operational expense for day-to-day functioning of the branches includes expensse that are fixed in nature and those which are variable. The fixed expense includes the expenses towards: Salaries to Employees Rent Security Charges Insurance Premium

The variable expenses include the following: Interest Expenses Printing & Stationery Expenses Marketing Expenses Courier Charges Travel & Conveyance Repairs & maintenance 28

Legal & Professional Expenses Electricity Charges Telephone Charges Miscellaneous Expense Rates & Taxes

Interest Expense Interest expense is also known as cost of funds. The money which is lent to the customer involves a cost to the borrower. It is the cost that the borrower incurs for raising the funds, may be from a lending institution (say a Bank) or borrowings through a parent company. Printing & Stationery Expenses It includes expenses for purchase various registers. Viz. Cash Registers, Key Register, Movement Register, In and Out Register. It also includes expenses related to printing of various documents and purchase of stationery items needed. Marketing Expenses Marketing costs can be specific or general in nature, depending upon the purpose of the branch. It includes mainly the expenses of printing of pallets, banners, sign board etc, distribution cost etc. Legal & Professional Expenses The includes payment made with respect to auditing of the branches, expenses related to Leave and License agreement, any other legal and professional charges that may have to be incurred from time to time. Occupancy expense The other expenses can be categorized as Occupancy expense. It includes both real and intangible expenses associated with the physical location. It includes such items as rent, maintenance, taxes, utilities, and depreciation, electricity expenses, communication charges. Personal Expense This head includes expenses that are specific to a branch. It varies from branch to branch. It involves expenses such as salaries of branch staff, security cost, regional quarterly incentive (commission), staff welfare, recruitment cost and housekeeping cost.

Revenues 29

The revenue includes the interest that is paid by the customers against the loan borrowed. It includes possessing charges, if any. It also includes penalty payments and other income received against gold loan.

5. Interest Calculation on Loan 30

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

Example 31

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) Part payment of principal and interest on a monthly basis. A person has taken a loan against gold Rs.1,00,000.00/-on Dt.10/1/10 at 18% p.a. Outstanding interest is calculated by using following formula:
Outstanding Outstanding Interest Rate of Interest Numbers of Days

Principle Amount

Per Year

Outstanding

12months

365days

He repays every month a sum amount which included principle & interest on total outstanding amount. Total Outstanding is equal to
Total Outstanding Outstanding Outstanding Repayment

Principle Amount

+
Outstanding Principle Amount 100000.00

Interest

Repayment of loan

of Loan

From date

To Date

Number of days

Outstandi ng Interest 0

Total Outstanding

Remarks

10/1/10

10/1/10

100000.00

Initial loan against gold

32

10/1/10

10/2/10

32(22+10 )

100000.00

1578.00

26578.00

75000.00

11/2/10

10/3/10

28(18+10)

75000.00

1036.00

11036.00

65000.00

11/3/10

31/3/10

21(21+0)

65000.00

673.00

10673.00

55000.00

1/4/10

10/5/10

40(30+10 )

55000.00

1085.00

11085.00

45000.00

11/5/10

5/6/10

26(21+5)

45000.00

577.00

10577.00

35000.00

Balance reduced on 10/02/10 because of repayment of 25000 & interest of Rs.1578 Balance reduced on 10/03/10 because of next repayment of 10000 & interest of Rs. 1036 Balance reduced on 31/03/10 because of repayment of 10000 & interest of Rs.673 Balance reduced on 10/05/10 because of repayment of 10000 & Interest of Rs.1085 Balance reduced on 5/06/10 because of repayment of 10000 & interest of Rs.577 Balance reduced on 7/07/10 because of repayment of 10000 & interest of Rs.552 balance reduced on 09/08/10 because of repayment of Rs.5000 & interest of Rs.395 balance reduced on 05/09/10 because of repayment of Rs.5000 & interest of Rs.266 balance reduced on 10/10/10 because of repayment of Rs.5000 & interest of Rs.259 balance reduced on 05/11/10 because of repayment of Rs.5000 & interest of Rs.128 balance reduced on 10/12/10 because of repayment of Rs.2500 & interest

6/6/10

7/7/10

32(25+7)

35000.00

552.00

10552.00

25000.00

8/7/10

9/8/10

32(23+9)

25000.00

395.00

5395.00

20000.00

10/8/10

5/9/10

27(22+5)

20000.00

266.00

5266.00

15000.00

6/9/10

10/10/10

35(25+10)

15000.00

259.00

5259.00

10000.00

11/10/10 06/11/10

05/11/10 10/12/10

26(21+5) 35(25+10)

10000.00 5000.00

128.00 86.00

5128.00 2586

5000.00 2500.00

33

11/12/10

31/12/10

21(21+0)

2500.00

26.00

2526

0.00

of Rs.86 balance reduced on 31/12/10 because of repayment of Rs.2500 & interest of Rs.26 ACCOUNT CLOSED

TOTAL

6. 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.

34

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 contines.

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 Total Cost Profit/(Loss) after 17 months 395,421 362631 32,790

Scenario 2 Assumptions

35

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. 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 April next year. Total Revenue after 16 months Total Cost Profit/(Loss) after 16 months 767,193 362631 404,562

Scenario 3 Assumptions

36

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 Total Cost Profit/(Loss) after 19 months 1,212,409 362631 849,778

7. Comparison with Existing Players

The comparison of FCFSL is made with the existing competitors. Viz. Muthoot and Mannappuram. The comparison is made on the following aspects: 37

Branch Structure Schemes offered Interest/ Penalty Calculations Loan to Value Marketing Expenses Profitability Branch Costing

Branch Structure At Mannapuram Fianance

Branch Manager

Assistant Branch Manager Junior Assistant (Operation)

Customer Service Executive

Junior Assistant (Cashier)

Junior Assistant (Valuer)

At Muthoot 38

BM/BI

Assistant Branch Manager Customer Service Executive At Future Money Branch Manager Junior Executive

Accounts Executive

Valuer

Customer Care Executive

Valuer

As per the comparison in branch structure of all Mannapuram Finance, Muthoot Finance, & Future Money, following observations are made. They are as follow :points come into the focus There is same branch structure in the Mannapurram Finance & the Muthoot Finance. In branches of Mannapuram & Muthoot Finance, Tthere are three layers evel of manangementmanagement in the Mannapuram Finance & Muthoot Finance namely at top level, middle level & bottom level. The branch manager is responsible for the work of Assistant Branch Manager & sending the various report to head office. The assistant manager is responsible for work of CCE, JE, AE & Valuer.In branches of Mannpuram & Muthoot Finance, it is found that there are Branch Manager head of the functioning of the branch & make submission of various daily report to head office. Assistant Branch Manager supervises work of Customer Care Executive, Valuers, Junior Executive & Account Assistant of the branch & make submission of various reports to Branch Manager. While Valuer, Junior Executive, Account Assistant, Customer care executive are to be responsible for gold valuation, helping to other colleagues, maintain the accounts, cash balance & handle the customers respectively. But in Future Money, I find the following difference in respect of In future money There are only two level of management There are only three peoples in branch 39

Each one is performing dual role in Future Money. Like Branch manager is is acting as Branch Manager Responsibility and also the Aassistant Bbranch Mmanager Responsibility. & branch mager function Customer executive is responsible for jJunior Eexecutive responsibilities & his own responsibility of handling the customers. & own job responsibility Valuer is responsible for Account Eexecutive Responsibility & his own gold valuation job.job responsible it is found that in Branch Management of Muthoot Finance & Mannapuram Finance there are three layers & total six peoples but in Future Money there are only two layers & 3 peoples. This is because Future Money freshly enter into Loan against gold business & they grouped the duties of Branch Manager & Asst manager into Branch manager. Customer service executive & Junior executive grouped into Customer Care Executive & also they grouped the responsibilities of Account executive & valuer into the only valuer. Schemes Offered At Mannapuram Fianance
Schemes Loan Amount ROI Days

X S3 A B C D S5 X Plus

1787.00 1572.00 1687.00 1637.00 1437.00 1287.00 1637.00 1812.00

2.34% 1.42% 2.25% 2.25% 2.25% 1% 1.59% 2.34%

30Days 30Days 90days 180days 365days 30Days 30Days 30Days

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 1425.00 14700.00

40

CPL is only for Bank Gold Coins.

At Future Money

Scheme Min Loan Max loan Max Tenure Per Gram Rates Solid Orname nt Others ROI-PA

Laxmi 10k 25k

Dhan laxmi 10k No Limit

Maha laxmi 10k No Limit

Surya Laxmi 10k No Limit

Kripa laxmi 10k No Limit

Staff 10k No Limit

Coins 10k No Limit

Platinum
10k No Limit

12

12

12

12

12

12

12

1568 1476 1384 2.08

1476 1384 1292 1.25

1568 1476 1384 1.5

1753 1661 1568 2

1292 1199 1107 1

1753 1661 1568 1

1845 NA NA 1.75

1500 1450 1400 0.95

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 comparisioncomparisons 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 Mmannapuram Ffinance 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 of Platinium to attract the customer & to create customer base where so they will be providing 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 Interest/ Penalty Calculations 41

At Mannappurram 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 entire period (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 onwardFrom the Beginning of Interest calculation date to the date of payment of interest) 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 Manappurram and Muthoot Finance

Loan to Value In mannapuram 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% of Gross Weight) 12.9 LTV (Rs.) 23375 (12.9*1812)

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= Nt weight Rate per gram Amount Offered (Approx.) 42

EPL XPL RPL TPL

2.25 1.58 1.33 1

14.5 14.5 14.5 14.5

1525 1455 1275 850

22500 21000 18500 12000

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

Risk Management Risk management is the process of analyzing exposure of risk and determining how to best handle such exposure. In loan against gold business, there are following ways to control various risks. Every NBFC follow the systematic strategy to control risk or avoid major amount loss. Risk Management at Branch Level Every branch manager of branch must take following steps to control risk : At each branch, adequate safety and control should be maintained. Safety tools like CCTV cameras, Alarm, Hooters are to be installed. 43

The CCTV cameras, Alarms are to checked on a fortnightly basis by the Branch Manager. Company has tied up with an external agency who will provide intimation to the branch. At every branch, all the keypads have a pre-programmed button. Password of the Keypads should be with two persons, one is the branch manager and the other is the Regional Head. In case of theft or medical emergencies, the button if pressed by anyone will provide the intimation of such event to four parties. Viz. Supervisor, Administration Department, Regional Head and the Police. Details of five people are to be taken at the time of signing off who will be informed in case of above such event. Security guards are to deployed on 24 hours basis for surveillance. However, the guard must not allowed to enter the branch unless necessary. Gold received as collateral from the customer is stored at gold security company(GSC) like CMS. The gold is picked up from each branch between 4 pm to 6 pm. The details of the gold sent to GSC has to be properly recorded. In case the customer walks after pick up, then the collateral (Gold) has to be kept at the branch overnight in the vaults safely till the next pick up. Gold which is stored overnight is to be adequately insured. An MIS of the reports sent to GSC has to be maintained. At the time of Pledging the loan against gold

Gold iteam like Chains, bangles, rings, necklace, earring, studs, coins, kadda upto 30grams, tikka, nose rings etc are to be pledge against loan. Gold Iteam like gold biscuit, gold bar, diamonds, white gold, kundan sets, gold wrist watches, mukud / taj etc are not to be pledge against loan. Risk Management At the time releasing gold Following things must be checked:-

Customer identity proof (with photograph). Customer Copy of pledge form handed over while disbursal. 44

Existing loan details from the system. After checking the above things, total amount due should be collected in cash including principal amount, interest, penal charges & any other charges applicable. Then, the cash receipt should be issued to the customer. Contents of the jewellery packets is to be cross checked with the pledge form Customers signature on pledge form is to be obtained, should be tally with the previous signature. The details of the gold given in the pledge form in terms of Gross and Net Weight should be verified and it should tally. Post all confirmations jewellery is to be handed over to the customer and account is to be closed. On release of jewellery Customer Copy of Pledge form is to be taken back and the same should be recorded. Confirmation to be sent to COPS. Copy of photograph given to the customer at the time of providing him the loan has to taken back from him. For release of gold, a request is needed to be sent to Gold Security Company (GSC) by an authorized person. It takes around 24 hours for gold to reach the branch from GSC. So, the customer has to be requested to provide an intimation before 24 hours of his intention to pay off the his dues. COPS has to be given an intimation on the release of gold.

Risk Management under exceptional cases of Releasing of Gold I .)Borrower Copy Lost An intimation of the same needs to be sent by the branch to the business Head & Credit Head mentioning the reasons & requisite approvals obtained post completion of process detailed below. Format of Indemnity Bond is to be provided to the customer. He has to get it Notarized from a notary on Rs.100 stamp paper . An ID proof and residence proof of the customer should be obtained and cross checked with the existing documents which were executed at time of loan sanction.

II .)Borrower Deceased Gold which has been pledged can be released only to the spouse, parents or children. 45

Death certificate is mandatory for all cases. Undertaking by the legal heirs on Rs. 100 stamp paper is to be provided indemnifying the company incase of any loss. ID proof of the legal heirs. In case, no nomination is given by the deceased borrower than legal heir who claims has to submit NOC on Rs. 100/- stamp paper from other family members with a copy of their I.D. proof and the same is to be witnessed by two persons other than family members.

Risk Management during Pledging of Spurious / Low Carat Ornaments Mannapuram Finance & Muthoot Finance are not accepted gold below the 20 carat but future money provide loan aginst gold below 20 carat after satisfying following conditions All prescribed tests should be done in order to ascertain the purity. Incase of any doubt, the gold should not be accepted. It is the responsibility of the entire branch if any such ornaments are accepted. Incase on a later date it is found out that the items pledged are spurious or low in carat BM to take prompt action for recovery of dues. Incase it is found out that deliberately customer has bought spurious/stolen jewellery a police compliant can be filed after approval from Head Office. Branches to display signboard mentioning that pledging/ attempting to pledge spurious gold is a criminal offence punishable with imprisonment. Branch needs to be very cautious of last minute borrowers because such cases mostly take place when branches are about to be closed.

Risk Management if Missing Gold Packets There will be also the risk of missing gold packets under such situation it will be manage in following ways If any gold packet is missing, it should be immediately informed to the Head Office. Gold packets are to be checked and re-checked with assistance of Regional Manager and submit report to Head Office. If the packet is not traced during the checking the Regional Manager should conduct a detailed enquiry and also inform the borrower who has pledged the ornaments.

46

Head Office will take decision on the matter based on the enquiry and on remarks of the Regional Manager. Necessary reporting to Insurance company/ Police etc will be handled out of the Head Office.

Risk Management in case of Burglary In the event of burglary, the risk will be managed by following ways Branch should be immediately inform to Head office Police complaint should be filled and case needs to be registered/ obtain the FIR copy from the police. Conduct a complete verification of cash and gold packets and submit report on the loss to head office. Coordination with the insurance company will be handed out the Head Office Risk Management in case of fall in gold prices In case of there will major fall in prices of the gold then the company will ask the borrower to pledge additional gold. Risk Management in case borrower fail to make repayment the loan amount On non-payment of dues by the customer and repeated reminders sent to him with respect to it, a notice of auction of security is sent to him. Eventually, the security is auctioned. The auction process would take place 3 months after the due date has passed. The following process is undertaken so that the customer can avoid default. On the 7th day after the due date, a Reminder would have to be sent via Registered Post to the defaulting customer. One month after the due date, a Notice of Reminder would have to be sent by Registered Post cautioning him that the jewellery would be sold in case the borrower does not repay the amount. 3 months after the due date, a final notice would be issued in the local news paper to the customer giving the date, time, and location etc of the auction.

Finally, the auction process is held. The Risk/Policy/Business Head/ Operations Head manage the proceedings of the auction. They have to ensure the following: The principles governing the public auction are adhered to. Adequate care is to be taken to prevent the bidders from forming a ring / group and to ensure free and fair auction.

47

In case there is a suspicion of formation of a ring by the bidders or that the final bid is not a fair price for the security auctioned, the auction proceedings may be postponed / cancelled after due intimation to all the parties present. The pledger (borrower / customer) of the gold ornaments is entitled to redeem the same at any time before the securities are finally knocked down in auction. Provided he clears all the dues to the bank. All papers connected with the auction proceedings such as the copy of registered notice issued to the borrower, auction sale notice, news paper publication, attendance of bidders etc is to be kept on record for future reference. Minimum Bid Price for auction of gold needs to be determined before the auction starts. The following costs need to be included: o Charges towards conducting the auction including notices in news paper, regulatory charges, (If any) eg. In certain locations sale of gold through auction entails certain charges towards sales tax etc. o Interest amount o Principal amount Central team should ensure that the seal in intact when they take the custody of the Jewellery. Incase any evidence of tampering is found, the box is to be opened in the presence of the Appraiser / s, Operations Officer and Loan Officer. The contents would be verified and re-appraised. Also, the matter would be referred to the Risk Containment Unit for further investigation. After the auction is completed and the money recovered from the purchaser, the amount received will be adjusted in the manner specified below: o Charges towards conducting auction, including notices in newspapers etc. o Interest repayment o Principal amount Balance if any after appropriating the charges as above is to be be given to the borrower or legal heir by issuing a cheque / draft in favour of the borrower. Since this is a pledge it is not necessary to go through the court for any part of the auction process. If there is no bid above the Minimum Bid Price, another auction is conducted where the jewellery would be sold at the highest bid price. The balance amount [Principal (+) Interest (+) Charges for conducting the auction (-) Amount realized from auction] would be recoverable from the borrower. Future Money / Future Money employee would not be allowed to participate in the auctions.

48