Summary of this article
When gold prices see an uptrend and, at the same time, other forms of credit become scarce or costly, people turn to gold loans to meet their financial exigencies. Gold loans have a lower rate of interest if availed from organized lenders (banks and NBFCs) compared to unsecured loans such as personal loans.
A gold loan is one of the conventional means of availing credit, especially in middle-class and lower-middle-class households. It also acts as a multi-purpose emergency credit line.
When gold prices see an uptrend and, at the same time, other forms of credit become scarce or costly, people turn to gold loans to meet their financial exigencies. Gold loans have a lower rate of interest if availed from organized lenders (banks and NBFCs) compared to unsecured loans such as personal loans.
The factors driving gold loan demand in India include a spike in gold prices, a boom in middle-class consumption, rapid urbanization, and the expansion of gold-loan NBFCs that brand gold loans as a viable option.
In recent years, a surge in demand for gold loans has been observed, as it offers higher loan amounts due to the consistently rising gold prices. According to the World Gold Council (WGC), India and China are the world’s largest consumers of gold. While China focuses on gold-based investments, India’s business is centered around gems and jewelry.
“Indian households, including temples, hold around 25,000 tonnes of gold, valued at approximately $2.4 trillion at current market prices, and almost 5,000 tonnes of it is pledged with different types of lenders. It is estimated that only 40 per cent of this pledged gold is with organized lenders and the rest is with local moneylenders or unorganized players,” says Umesh Mohanan, Executive Director & CEO of Indel Money.
However, the situation is slowly changing. With the expansion of gold-loan NBFCs across the country and their digitalization of operations, gold loans have secured the status of a safe and secure loan product. Realizing the potential, scheduled commercial banks (SCBs) have also stepped up their exposure to the segment, offering customers enhanced features, facilities and services.
Yet, it remains a puzzling question as to who offers the best deals to borrowers. Let’s examine the SCBs first:
(i) Banks have access to cheap funds and, therefore, they can offer low interest rates to the retail borrowers.
(ii) They can also use low-cost funds intended for priority sector lending (PSL) for providing gold-based agriculture loans.
(iii) The lenders, especially Public Sector Banks, have a presence even in remote villages, and they have the necessary security infrastructure like safe deposit lockers in every nook and corner of the country. Thus, “their establishment cost and operational costs are comparatively low. So, they can offer better rates (interest rates, other fees, and penalty charges) to their customers,” says Mohanan.
(iv) However, there are some operational hiccups. Primarily, banks are not meant to do the gold loan business. It is only a corollary to their main lending activity. So, gold loan customers may not get preferential treatment at their counters.
What About NBFCs?
(i) Notably, gold-based lending is the mainstay of gold-loan NBFCs and they have expanded their business through digital adoption and fintech partnerships. Though fintechs can’t operate independently in the market, they provide back-end services to the NBFCs such as credit rating of the borrower, collateral appraisal, and various compliance mechanisms.
(ii) NBFCs have advanced systems for the safety of collateral, improved operational efficiency, and AI-enabled tools for gold appraisal and risk management, which make loan processing faster. These features help them offer innovative products and services such as ‘express gold loan’, ‘instant money’, ‘digital gold loan’, ‘top-up loan’, and ‘doorstep loan services’.
(iii) RBI’s relaxed guidelines for small-ticket borrowers (loans below Rs 2.5 lakh) also play a significant role in maintaining their operational efficiency, swiftness, and customer-centered activities.
(iv) However, “a noted disadvantage is that since the NBFC funds are priced at market rate, they have to charge a higher interest rate on their customers. To compensate this, they offer a host of additional services such as waiving off processing fees and penalties, flexible repayment options, digital payment facilities, and allied financial services,” says Mohanan.
This focused approach, combined with digital adoption and enhanced customer services, helps NBFCs strengthen their presence in the gold loan market.
