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...