Sri Lanka’s Samapth Bank’s pawn broking business grew 80 percent during financial year 2010 accounting for 45 percent of the total growth in loans and advances, bank officials said.
Loans and advances at Sampath, the third largest private sector bank in the island grew 30.3 during the financial year ending December 31, 2010, to 128 million rupees of which 23 percent were advances provided for pawned items.
“We saw an increase in the other lending areas as well but pawn broking was the main contributory factor,” said Harris Premaratne, the chief executive officer at the bank of the business which has seen a steady increase since 2008.
Pawning, an asset backed credit facility that can be obtained to meet cash requirements had the largest exposure to Sampath’s credit growth in 2009, accounting for 18 percent of loans compared to 14 percent a year earlier and a nine bank peer average of four percent.
Growth in pawn broking last year accounted for 45 percent of the total loan growth at the bank which has a network of 175 branches in the island including the north and east.
Pawning is a common practice throughout South Asia and the industry’s success was largely driven by the desire of most Asians to hold assets in gold jewelry. The Asian preference for relatively pure gold, usually at least 24 carat, has also helped to ensure a regular source of business for the industry.
During difficult economic times people would convert these assets in to cash by depositing them in exchange for a loan. Such collateral-based loans are a hedge against inflation.
Premaratne said with the increasing demand for credit in the island even small and medium scale businessmen resort to pawning to fulfill urgent cash requirements.
Gold prices in the world market is on an upward trend and Premaratne is confidant the bank’s pawning business is protected against a price drop due to the high rate of redemption.
“We should be in a position to take a hit but our experience shows that 97 percent of pawned items are redeemed. So even if the gold prices come down it will maximum be a five percent that will not be redeemed. And the hit will be the price difference on that five percent.”
Aravinda Perera, the chief operating officer at Sampath said the bank is continuously watching gold prices and will adjust the quanta per sovereign accordingly.
“We do a calculation based on risk and a sensitivity analysis to find out where we stand in an year’s time. It has been to our favor because gold prices have appreciated during the last couple of years.”
Credit risks and associated recovery costs are largely avoided in the pawning business as pawnbroker can recover the advance by auctioning collateral. The risk is transferred to the customer of whose interest is to pay back the loan and redeem the pawned item.
Sampath Bank posted healthy results for the year ended on December 31, 2010 with profits after tax surging 57.4 percent to 3.3 billion rupees.