A recent KPMG report titled ‘India’s gold loan market: Is the glitter fading?’ says that the organised gold loan market in India is expected to grow to over Rs 3 lakh crore by 2020 at a three-year compound annual growth rate (CAGR) of 13.7%. The report further cites the World Gold Council (WGC) which estimated last year that average demand in the country would go up to around 850 to 950 tonnes per annum by 2020, with two-thirds of this demand coming from the rural market. India is one of the largest consumers of gold, which had an estimated total stock of 23,000 tonnes in 2016, the majority of which is held by households, according to WGC data. “With the country’s growing population and ever increasing disposable income, India’s fondness and inclination for gold has also increased manifold,” the report said.
In India, gold lenders are categorised into two categories. The formal sector consists of banks, non-banking finance companies (NBFCs), and cooperatives, whereas the informal sector is made up of categories like moneylenders and pawnbrokers.
According to KPMG, gold loan companies are expected “to continue delinking the gold price volatility risk by offering more variants of lower tenure loan products.” Noting that increased competition from small finance banks are having a yield reducing impact, the report said the gold loan space is likely to see “interesting partnerships with fintechs (financial technology companies) to help streamline and automate processes.” The increased competition from Small Finance Banks (SFBs) reduces the yield and players should invest in technology and automation.
The report shares a unique proposition for centralised storage and digital gold – a model which is a ‘centralised gold locker unit’ where one can securely park gold and obtain a secure digitised gold certificate post appraisal. This model will reduce the cost of storage and operations. It will lead to unified gold appraisal and lower locker facility charges.
Gold loan is a secured loan where gold ornaments, bullions or coins are kept as security. This loan can be used for any number of purposes. NBFCs have fewer restrictions on the purpose of the loan. The loan applicant does not have to disclose his income or salary. It can be availed by non-working individuals as well. The loan is disbursed quickly as it involves less documentation. Gold loans have a higher Loan-to-value ratio. NBFCs offer up to 95% of the purity of the gold while banks restrict themselves to a maximum of 75% of the purity. There is no minimum tenure.
Where lenders take possession of the gold assets in a loan transaction they may not have enough funds to compensate all borrowers in case of theft. This is more important for loans placed in the unorganised sector. Banks and NBFCs usually have better security and insurance coverage. These loans are attractive as long as the ‘margin of safety’ is within reasonable limits. Typically, the rates would be lowest when the amounts borrowed do not exceed 50-60% of the market value of the gold. In other words, the more gold/gold jewellery is pledged for the same amount of loan, the lower will be the rate. The rates could vary between 10% to 17 % per annum.