Mercantile Investments’ gold loan portfolio surges Rs.4bn in 6 months

• Unique rural model keeps default rates below 1%

By Nishel Fernando
Mercantile Investments and Finance PLC (MI) has recorded a rapid expansion in its gold loan portfolio, which surged by Rs.4 billion in just six months to reach Rs.15 billion by September 2024. 
This growth comes as the company successfully differentiates its offering from the standard pawning services, adopting a livelihood-focused lending model that has kept the non-performing loans in this segment at an industry-low of less than one percent.
The gold loan portfolio now constitutes approximately 16 percent of the company’s total loan book, becoming a pivotal component of its asset base.
This performance stands in stark contrast to the broader industry trends highlighted in the Central Bank’s recent Financial Stability Review. According to the review, the licensed finance company sector—which manages a total portfolio exceeding Rs.1.84 trillion—has seen a worrying rise in the “unredeemed jewellery” or gold loans facing auction. The report noted that the stock of the unredeemed jewellery in the sector had jumped from Rs.210 billion in 2019 to a staggering Rs.571 billion by March last year, indicating high levels of distress borrowing and default risk within the industry.
MI attributes its resilience against this industry-wide stress to a “bundled product” strategy tailored specifically for the rural economy. Unlike the traditional pawning, which often funds consumption, MI’s model focuses on bridging working capital gaps for productive economic activities.
“We don’t just look at the asset value; we look at the cash flow cycle of the borrower. For instance, we have a specific product bundled for the farming community in the upcountry areas where they need to invest in the land and wait three months for the harvest. Our facility is designed to bridge that specific gap,” said Chief Operating Officer Laksanda Gunawardena.
This approach has effectively insulated the company from the high auction volumes plaguing the competitors. 
“Despite a Rs.15 billion portfolio, our last auction value was only Rs.93 million. This proves that our customers are redeeming their articles because the loan was taken for a productive economic activity, not just distress borrowing,” a company official added.
The company has leveraged its 73-branch network to take this product to grassroots level, moving beyond the Western province, where the credit concentration is typically high. By treating gold loans as a working capital tool for small traders and farmers rather than a simple consumption loan, the company has managed to mitigate the “commodity price risk” that the regulators often warn against in this segment.
Looking ahead, the management remains optimistic about the gold loan segment, projecting it to be a key driver of its medium-term growth strategy. With the rural economy showing signs of revival, the company expects sustained demand for collateralised credit that offers the borrowers quick access to liquidity without the burden of long-term debt.