Regulation 16 of FEMA 20R has been provided by the Reserve Bank of India wide circular Notifica...
In a recent report published by KPMG, the Indian gold loan market is projected to reach Rs. 461,700 crore by 2022 with a compound annual growth rate of 13.4 % from the financial year 2018-22. In the last few years, the gold loan companies have expanded their network in many Indian states where penetration was less evident. Due to the emotional attachment with gold jewelry, all people in India rarely sell it to meet their financial needs. Therefore, people pledge their gold ornaments as collateral and obtain a short term loan for themselves. The gold loans are granted against the gold pledged by the borrowers; therefore, the amount of available gold with customers is a crucial aspect while identifying the gold loan market size in India.
Gold has been a commodity valued for a long time in India, and it has been used in the form of jewelry, coins, etc. Now the consumers have handled it effectively and met their needs through it. Lenders provide loans to consumers by securing gold assets as collateral. The gold loan market in India is enormous as compared to other countries. Until recently, the lending was made through pawnbrokers and money lenders in the unorganized sector; however, this underwent a massive change with the coming up of banks and NBFC’s (Non-Banking Financial Companies) in the market. In the recent past, the gold loan market has grown like never before, and NBFC’s have played a significant role in this regard. NBFC’s have an extensive network, fast turnaround time, higher loan to value ratios, and it also can serve non-bankable customers.
Only recently, the banks have also enhanced their gold loan product features and services. With rapid growth, the regulatory checks have also increased on gold loan lending. Especially NBFC’s are under the radar owing to their substantial interest rates and charges. It may impact the supremacy of the NBFC’s in the gold loan market in India. Gold loans have a huge growth potential in India, but the firms must develop strategies on distribution, product, and risk mitigation.Major Players in the Indian Gold loan market
The prime players in the gold loan market in India include the unorganized sector, banks, and NBFC’s (Non-Banking Financial Companies). The unorganized sector has dominated the Indian market for long, but the organized sector is also coming up at a fast pace. The pace at which the organized sector that includes the banks and NBFC’s is growing in the Indian market has really challenged the unorganized sector.
Due to the business models employed by the NBFC’s, they have shown an exceptional growth rate in the past few years, which can be deduced through their increase in the market share.
Various reasons for their tremendous growth can be attributed to-
Several features make the gold loan more and more favorable among people.
The essential features of the gold loan are:
Loans on gold are considered secured as the loan is taken on the back of gold deposited by the applicant.
The loan can be used for multi-purpose, but such use should not be for any illegal activity or speculation in the stock market. NBFC’s have fewer restrictions on the use of loans.
NBFC’s disburse loans at a faster pace in comparison to banks. Where banks take a few days’ time to disburse loans, NBFC disburses them in a matter of a few hours.
Banks may not give more than 75% of the gold value as a loan, but NBFC’s lends as much as 95% in case of pure gold.
There is no minimum period for the loan, and the borrower can repay the loan amount as quickly as the following day.
The interest rate on loan depends upon the amount and tenure of the loan. It varies from banks to NBFC’s.
The repayment may be structured owing to the provision of multiple repayment options.
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Information technology has played a vital role in the advancement of the Indian loan market.
Some of the essential roles of technology are-
The borrowers, as well as the lenders, face certain risks when they deal with gold-related transactions. As the lenders take possession of the gold assets in exchange for loan amounts, if there is a theft, then the lenders may not have enough funds to compensate the borrowers for their loss. This is a more crucial aspect in the unorganized sector as compared to the organized sectors like banks where it has better security and insurance covers. Moreover, providing financial help may not be able to compensate for the emotional attachment that a person has with his or her gold assets.
An increase in the prices of gold in the last few years and an increase in taking gold loans might give rise to default in repayment. Especially banks and NBFC’s who are in the business of lending gold loans might face a considerable case of defaults, which can affect the Indian economy adversely.
The organized sector has looked to manage these risks by different methods like enhanced security, insurance covers, etc.
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Intending to enhance its functioning as compared to the NBFC’s, the banks have improved their loan processes, and some banks have taken measures to disburse loans in a quick possible way. It may pose a challenge to the rise of NBFC’s. The cost of borrowing personal loans is increasing as the banks have hiked interest rates; therefore, more and more consumers may opt for gold loans in the future.
The emergence of online and digital models in the gold loan sphere by NBFC’s and new fintech players that provide gold loans to customers has promised for an untapped market for digitally enabled customers. In recent years the major gold loan players have attained geographical saturation, and now they are looking for other financial aspects to maintain growth. As per the reports doing the rounds, the NBFC’s will continue their dominance in the gold loan because of their quick decision-making process, faster adoption, and capturing of new markets.
The Indian gold market may still not be penetrated fully considering the availability of gold as collateral with the private Indian households; therefore, it provides for significant scope for growth of the Indian gold market.