Pricing a festival gold-loan campaign against a cheaper competitor
A branch's gold loan book is ₹8.5 crore across 640 accounts. Yield is 9.4% a year, cost of funds 6.0% and operating cost 1.2%, giving a net margin of 2.2%. For the 90-day festival season the branch manager proposes a 50 basis point rate concession on all new gold loans plus a waiver of the 20 basis point processing fee, supported by ₹75,000 on leaflets and local cable announcements. Last festival season, with no concession, the branch disbursed ₹62 lakh of new gold loans in 90 days. Competitors are quoting 8.75%. The concession would apply only to new accounts on a 12-month tenure; existing accounts cannot be repriced. Gold prices are stable and the loan-to-value policy will not change. The regional office sanctions marketing spend only where expected incremental business covers the concession and the campaign cost within the season.
1. Work out the break-even incremental disbursement for the proposal, and judge whether it is realistic.
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Margin after the concession: 2.2% − 0.50% (rate cut) − 0.20% (fee waiver) = 1.50% a year.
Break-even requires 1.50% × X = ₹75,000, so X = ₹75,000 / 0.015 = ₹50 lakh of incremental disbursement - business the branch would not have written anyway. That is on top of the ₹62 lakh baseline, i.e. a total of about ₹1.12 crore in 90 days, an 81% jump on last season.
Is it realistic? Partly. The branch is at 9.4% against a competitor's 8.75%, so the cut narrows a 65 basis point disadvantage to 15 basis points - a meaningful change in relative price, and gold loan demand is price-sensitive. But an 81% volume jump in one season is a stretch on ₹75,000 of local advertising and no branch capacity change. The honest conclusion: the proposal is not automatically wrong, but it should not be approved as a blanket concession; it needs a ticket-size floor or a cap on the concession so that the ₹50 lakh target is reached with fewer, larger loans.
2. Should the concession be extended to renewals and top-ups of existing accounts? Answer with numbers.
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No. It converts existing margin into a discount with no new business.
The book is ₹8.5 crore. If even 20% of it (₹1.7 crore) were repriced into the concession on renewal, the 50 basis point cut plus 20 basis point fee waiver would cost about 0.70% × ₹1.7 crore = ₹1.19 lakh a year, against a campaign budget of ₹75,000 and a break-even volume of ₹50 lakh. In other words, repricing existing accounts would consume more margin than the entire campaign is designed to generate, and it would be permanent while the campaign is temporary.
There is also a behavioural cost: once customers learn that renewals attract a discount, they wait for the next festival, and the branch trains its book to be rate-sensitive. The manager should be told to offer renewals at card rate, and to use the concession strictly for accounts that are new to the branch, since that is also the only business that shows up as growth.
3. At the 45-day review, what should be measured, and what are the stop, continue and expand criteria?
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At 45 days the branch should be halfway to ₹50 lakh incremental, i.e. about ₹25 lakh above the baseline run-rate (baseline ≈ ₹31 lakh in 45 days). Measure four things: incremental disbursement against that path; share of business from customers new to the branch (if most is internal churn from the branch's own term deposits or switching from another product, the concession is buying nothing); average ticket size, because a concession that raises ticket size reaches break-even with fewer files; and the competitor's card rate, since the branch remains 15 basis points above 8.75%.
Stop if incremental business is below about ₹15 lakh at day 45 or if new-to-bank share is under half - the season will not recover the ₹75,000 and the concession is simply cutting margin. Continue if the run-rate is on path. Expand only if the competitor has moved and the branch is still losing files on price, and then expand by targeting a narrower segment or a ticket-size floor rather than cutting the rate further for everyone.