Gold Loan Service in India
Management of Financial Services
Submitted to: Submitted by:
Dr. Sanjay Medhavi Mayank Raj
MBA III sem. Roll no. 28
Department of Business Administration
University of Lucknow
Gold considered an auspicious metal is opening up business opportunities in India. Largely driven by the unorganized segment in the past, most of whom included the pawn brokers, the gold loan market has now started to be driven heavily by the organized segment. The stigma attached to pledging gold is slowly thinning among people while companies are campaigning that gold is an effective assistant at the time of financial need. Express loan within 5 minutes is the most attractive feature of this loan product offered by almost all the market leaders. The Characteristic of the gold loan product is that the average tenor of the loan is about 90 to 100 days. Investors have found this product attractive with short term tenor. Moreover, the risk involved in the product is less. Gold loan companies offer loan against a LTV (loan to value) ratio of about 75 to 80% which makes it less risky. Any movement of gold prices that makes the value of the security to fall below the loan offered would make the company exercise a margin call or cancel and issue a fresh loan. The sentiments attached with the gold ornaments pledged also makes gold loan less risky With the success of many players, many institutions have identified that this business model is not hard to replicate. But in almost all the business models, one has to identify the sustainable source of competitive advantage. In case of gold loan market, 80 to 85% customers are repeat customer. Hence the source of competitive advantage would be the trust that private institutions can build over time and transparency in the process. The major running cost of the business model would include staff cost, advertisement cost, rent, bad debts and provision for doubtful debts. Fixed cost would include the gold safes and other apprising equipments.
Gold Loans: A High Growth Industry :
According to ICRA Management Consulting Services Ltd.(IMACS), India is one of the largest market of gold accounting with about 10% of the world gold stock weighing 18000 tons of gold. Value of gold stock has been growing at about 22% (CAGR) since FY 2002 in India. According to Manappuram finance limited, the second largest market player in the gold loan industry, only about 10% of the gold available in India is used for gold loan leaving room for potential business opportunity. Southern India is the largest market accounting for 40% of India’s gold demand, followed by West at 25%, North at 20-25% and East at 10-15% of annual Gold demand. Gold Loan Market in India:
* There is a large unorganized gold loan market dominated by pawnbrokers and money lenders .
* Share of organized is growing rapidly with emergence of specialized NBFCs which we believe is due to Lower rate of interest; Aesthetics of branch; Safety of the ornaments and Fidelity risk avoided.
* Huge under penetration in India of Gold Loans. Southern region accounts for 85-90% of Gold Loans market in India.
* Organized Gold Loans in India have grown at 40% CAGR from FY02-10 and expected to grow at 33-41% CAGR in FY11.
Source: IMACS Report on Gold Loans Market in India 2009 and Updated Report on Gold Loans Market In India 2010
Gold Loan as a Product:
Loan against Gold Ornaments is a product designed to provide liquidity against gold ornaments without having to sell them. Gold ornaments lying idle can be put to productive use by availing Loan against Gold Ornaments. Loan will be sanctioned on submission of all the required documents and satisfactory assessment of gold ornaments. Loan amount is disbursed by...