Gold loan Market in India 2021

Gold enjoys a prestigious place in the hearts and minds of Indians all around the country, and even abroad where they live. Gold items are seen as the representation of social status, financial security, and cultural legacy. It is also traditionally seen as a liquid asset and is widely accepted as a security in lieu of money due to its value and purity. It is therefore no surprise that India is one of the largest consumers of gold in the whole world.

Between 2018 and 2019, India alone accounted for 23% of the global gold demand. In India, gold holdings are concentrated in rural areas, which accounts for two-thirds of the demand for this commodity.

Price movements of gold

Since the last 5 decades, gold prices in the country have been showing healthy growth. Around 2003, gold prices saw what is known as an inflection point, and prices rose to levels never seen before. After 2013en years later, gold prices saw a rapid rise once more, after which the price fell due to global price fall after 2015. After this point however, there was a price surge once more. The last three years are showing healthy growth once more.

The gold loan market

In India, people have an emotional bond with their gold items such as gold jewelry. Thus, these are rarely sold off, except to meet emergency and immediate financial needs. Instead, they give their gold items as collateral in return for short-term loans. This happens a lot in rural areas where farmers take short term loans by keeping their gold items as collateral. Broadly, gold loan lenders are classified into:

1. Formal or organized sector

2. Informal or unorganized sector

Gold loan customer segments

Number of households (total 293 million)	Credit Consumption categories	Primary providers
High – 8 million and 3% of market	Housing loan, Auto loan, CD loan, Personal Loan	Banks, NBFCs
Upper-mid – 61 million – 21% of market	Housing loan, Auto loan, CD loan, Personal Loan, Gold loan,	Banks, NBFCs
Lower mid – 97 million – 33%	Housing loan, Auto loan, CD loan, Personal Loan, Gold loan	Co-operative banks, NBFCs
Low – 127 million – 43% of market	MFI/SHG loans, Gold loans	Co-operative banks, SHGs, Gold finance companies,

Industry Overview   

Borrowers get gold loans against their pledged gold items such as gold jewelry. Therefore, the quality and quantity of gold that is available to a customer is quite an important parameter in the determination of this market’s size. In 2019, the total gold loan outstanding in the organized sector alone was 5.5% of the total household gold holding in the country. This showed a very low market penetration. However, the same is expected to rise due to increased economic activity and gold monetization.

Let’s talk about the organized gold market now. 

Organized gold loan market

This market is made out of public, private, co-operative and small finance banks. NBFCs or Non-Banking Financial Companies as well as Nidhi companies contribute to around 35% of the market. NBFCs giving specialized gold loans have consistently raised their market share after aggressive investment in promotions, branding and in geographic expansions. Geographic reach, presence and enhanced brand value continues to help NBFCs consolidate new markets by taking over a large part of their new customers.

Banks consider gold loans primarily as a means of meeting PSL or Priority Sector Lending, by offering such loans for other PSL purposes or for agriculture. Banks do not have flexibility and fast turnaround time, both of which are central for the gold loan customer segment.

Because of this problem with banks, NBFCs are in the perfect place and time to increase their gold loan customers and market share. An analysis of NBFC gold loan books show that their credit outstanding has grown at a rate faster than that of banks.

The arrival of Small Finance banks in the gold loan market segment as well as the arrival of Nidhi companies is further expected to increase the total customer base in the organized gold loan market. Such companies, who have more rural presence, and in the perfect place to serve customers with more financial inclusion. They are able to get funds at cheaper rates from deposits, and thus are a good competitor to NBFCs.

The Unorganized Gold Loan Market

Traditionally, gold loans have been provided to people by pawn brokers and money lenders, especially in rural areas. Currently, the unorganized gold loan market accounts for almost 65% of the total market share.

Unorganized market players have an advantage the others don’t have: local market knowledge. They also give gold loans faster and need less documentation. The downside is that they charge very high interest rates, and thus customers are always at a risk of getting exploited by loan sharks in the unorganized market.

With financial service companies trying to come into the unorganized market, a large part of the segment customers are shifting to such new entrants. Such a shift has aided many customers in getting loans from a formal credit system. It has helped new customers in getting credit records, which helps them to get more loans from the organized gold loan market.

With faster loan-processing capabilities and faster accessibility due to more branches, specialized gold loans from NBFCs are here to take over a large part of the unorganized gold loan market customers.

Development of online gold loan schemes

Today, there are many Fintech companies who are strong players in the gold loan market. These entities are now offering innovative products like online gold loans to the urban and young customers. The primary beneficiaries of such developments are urban, literate and digitally savvy customers between the ages 25 and 40.

Gold loan companies are now coming up with multiple operating models to strengthen online gold loan processing. The success of online gold loan schemes by different entities depends on operational efficiency from valuation, gold storage, loan disbursement, loan collection and closure.

Key challenges facing the gold loan industry

Gold price volatility

Gold price volatility has a strong impact on the general performance of all gold loan products. The Loan to Value Ratio, which is responsible for determining the liquid potential of gold items, is correlated negatively to gold price fluctuations. Therefore, an increase in gold prices will only result in companies giving loans with low LTV if they want to minimize risks. A decrease in gold prices will, on the other hand, increase a probability on loan delinquency since the pledged gold value goes below loan outstanding value.

Companies try to get over this problem of price volatility in gold prices by offering customers a shorter loan tenure, which helps to avoid negative impacts on NIMs or Net Interest Margins. 

NBFC Liquidity stress

Do you know why there has been a series of AAA downgrades in NBFCs? Things which have seriously hurt the market confidence in the NBFC ability to boost credit ratings? This is because of the liquidity crunch. Till now, NBFCs were known to be able to deliver returns faster, and at the same time serving as entities offering credit to those who otherwise find it hard to get any kind of credit.

Now, NBFCs are finding it hard to get new funds or raise funds themselves to grow their business. Thus, they seek government aid. It should be known that NBFCs play an essential role in the Indian economy’s credit infrastructure, and have accounted for almost 1/4th of credit given to customers. NBFCs mainly deal in getting short-term funds, and then using long-term ones. This however leads to asset mismatches. It demands from NBFCs to raise capital continuously.

When there is economic growth, there is enough market confidence to support this rapid capital accumulation and disbursal, while not when there economy is in dire straits like it is now. NBFCs who give gold loans have complete control over the collateral, and therefore have borrowings at a lower cost. However, the liquidity still affects gold loan companies adversely.

More competition and substitute financial products

Today, companies giving gold loans are competing not only with other competitors, but also against financial service providers. The unorganized market is thrice the size of the organized gold loan market, and it is still growing with a lot of potential. The unorganized sector is being encroached by players from the organized market.

In the recent few years alone, the top gold loan companies are facing geographical saturation point, and are considering other products like microfinance and SME loans to maintain their growth. Customers who previously had to pledge gold to get emergency cash, now do not need to give any collateral. Lenders are now partnering with Fintech companies to use advanced technology to influence the market. 

Microfinance firms

Nowadays, loan providing companies are facing stiff resistance from another front: microfinance firms. These firms are making it easier for customers to get small unsecured loans, even if they do not have a formal credit history. Banks have also entered the microfinance sector through business correspondence, thereby augmenting financial inclusion. Gold holding per loan has stagnated recently due to this rising competition, and is now seeing a downward trend.

Unsecured personal loans

The growth of unsecured personal loans can be attributed primarily to the growth in the target customer base, which includes salaried people with high technological and financial literacy. The growth is boosted by players in the Indian telecommunications market, where players are trying to maximize their digital connectivity. Banks and NBFCs are doing this already to get customers of unsecured loans easily by aggressive marketing and competitive pricing.

P2P lending

After the introduction of Peer to Peer lending platforms, the new players are lenders with a very different risk appetite. This enables customers, even with poor credit history, to get loans from P2P platforms.  The interest rate is larger, which is determined by the platform and the lender.

Employee attrition rates

Recently, employee attrition rate is proving to be a thorn in the side of gold loan companies. For instance, at a leading gold loan company in the country, the annual employee attrition rate is as high as 30%. This is a serious challenge to scalability and operational efficiency.

The Future of Organized Gold Loan market

 The gold loan market, by 2022, is expected to reach up to INR 4,617 billion at a 5-year compounded annual growth rate of 13.4%.

Financial year 2019 has seen gold loan companies expanding aggressively their branch network. This is especially done in the northern and eastern states where the market penetration has so far been low. Companies are not focusing on optimizing asset utilization and using their current branch infrastructure to maximize their branch-level AUM as well as customer outreach.

2019 has seen the emergence of digital and online models in gold loans, as developed by NBFCs and the new Fintech companies. These have paved the way to an untapped market which was so far not available to the urban customers. The gold loan industry is to invest more in developing its current capabilities to serve customers better.

2019 also saw a price rise in gold metals, an all-time high. Thus, companies are expected to be a lot more conservative in their loan disbursal approach, at least till gold prices stabilize. Till then, companies shall promote low LTV and loans for the short term to mitigate gold price volatility risks.

Even though the price of gold is expected to fall globally, the gold loan market is expected to rise in India. This is due to banks becoming more stringent and selective in disbursing credit. Growth is also being fueled by expansion in new geographical areas.