Surveying the Indian Gold Loan Market
Gold has long been a valued commodity, particularly in India where it is considered auspicious, and has been in use for centuries in the form of jewelry, coins and other assets. Though gold is a highly liquid asset, it wasn’t until recently that consumers leveraged it effectively to meet their liquidity needs. Lenders provide loans by securing gold assets as collateral. Compared with the rest of the world, in India the gold loan market is big business. Until a decade back, most of the lending was in the unorganized sector through pawnbrokers and money lenders. However, this scenario changed with the entrance of organized sector players such as banks and non-banking finance companies (NBFCs) which now command more than 25% of the market. The organized gold loan market has grown at 40% CAGR from 2002 to 2010. NBFCs have been a major driving force behind this growth given their extensive network, faster turnaround time, higher loan-to-value ratios and the ability to serve non-bankable customers. Of late, banks have improved their gold loan product features and services. Coupled with comparatively lower interest rates and charges, banks stand to gain market share at the expense of NBFCs in the near future. With rapid growth, regulatory scrutiny has increased on gold loan lending practices. NBFCs are under greater focus as a result of their higher interest rates and charges, and non-adherence to know your customer (KYC) regulations. This may further impact the dominance of NBFCs in the gold loan market. At just 1.2% of the total gold stock in the country at present, gold loans have a huge growth potential. However, firms need to develop distribution, product and risk mitigation strategies to get a share of the pie in a profitable and sustainable fashion.
Background: Gold and the Indian Society
As previously noted, gold has traditionally been among the most liquid assets and is an accepted universal currency. It has traditionally been consumed by individuals in the form of jewelry, especially in India where it is considered auspicious. Gold is presumed to be a safe haven in times of economic uncertainty, a fact exemplified by a 30% increase in the value of gold over the past year. India is one of the largest markets for gold, accounting for approximately 10% of the total world gold stock as of 2010. Rural India accounts for 65% of this gold stock. Though gold prices have increased at more than 19% CAGR from 2002 to 2010, gold stock in India has grown at 22% CAGR during the same period to 18,000 tons (Rs. 32,000 billion) as depicted in Figure 1. The demand for gold has followed a regional trend with southern India accounting for 40% of annual demand, followed by the west (25%), north (20-25%) and east (10-15%).
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Value of Gold Stock (Rs. Bn)
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 FY02 FY07 FY09 FY10 CAGR
Organized Gold Loan Market Size (Rs. Bn)
28% 25,000 32,000 600 500 41% 500-530 50% 44%
37% 25 0 FY02
Source: Muthoot Finance, August 2011 Figure 1
Source: Muthoot Finance, August 2011 Figure 2
Indian households typically have an emotional attachment and sense of personal belonging to the gold they own, which is usually in the form of jewelry, coins or bars. Thus, gold owned by Indian families is rarely liquidated unless in extreme financial need — consequently, monetary value of a gold investment is rarely realized. But, pledging gold ornaments and other gold assets to local pawnbrokers and money lenders to avail loans has been prevalent in the Indian society for many decades, particularly in rural areas. However, over the past decade, the organized sector – banks and NBFCs – have taken the lead. The urban populace is also beginning to realize the potential...