The commendable growth of major gold loan non-banking financial companies (NBFC) in India has attracted a lot of attention recently.
Some comments have even hinted at the customers being poor victims fleeced by these companies out to make a quick profit.
But the extraordinary growth in their business also means that despite other institutional options, individuals who require money urgently, and possess some gold, show a marked preference for the service of the gold loan NBFCs.
At the same time, no one can accuse the gold loan companies of being monopolists with sufficient coercive power to make people choose them over other options. Gold loan NBFCs, obviously then, meet a vital need in the market in a way superior to other players.
So what is it that makes them superior?
Credibility and Credentials
While availing a gold loan, customers must temporarily part with the family jewels which are precious to them beyond mere monetary value. They would rather entrust these to a lender who can be trusted to keep them secure and return these when required, intact and undamaged.
The large gold loan NBFCs are almost like banks and are well-governed, with established policies and procedures. Their branches have sufficient security measures such as strong rooms, CCTV cameras, guards and also specific procedures regarding access, in order to ensure safety of the collateral. Besides, they insure the gold against theft and other unforeseen events. Audits and inspections guarantee the continued integrity of the holdings. Handling and storage is also done carefully, so as to not damage the ornaments.
Apart from these, the reputation of the lenders and transparent institutionalised procedures followed by them assures borrowers of a fair deal.
The major gold NBFCs have in place proper KYC (know your customer) as well as Fair Practice Codes. In cases of recovery, too, borrowers are given notice and a chance to redeem the gold or keep their auction in abeyance through payment of interest, as in any bank.
Convenience and Comfort
Convenience is another important aspect that influences a borrower when he thinks of taking a loan against gold. For obvious reasons, he/she would not desire to commute long distances with the gold or cash in their possession. Since most locations are covered by gold loan NBFCs, the potential borrower can find a branch nearby with ease.
Moreover, since the borrowers mostly require small loans against a collateral that is universally acceptable as quickly as possible, and the NBFCs are specialised institutions with employees highly experienced in the assessment and disbursal of gold loans, they can obtain these much faster than at other lenders.
Some vestiges of the disrepute normally attached to gold loans still clings to the product.
A posh bank environment, where many high net worth customers would be around, does not put a gold loan borrower at ease. However, in the specialised environment of a gold loan NBFC, he is assured of being comfortable and at ease as the primary customer and concern of the lender.
Closeness, Confidence, Cost
Many gold loan NBFCs recruit at least some of their employees in each branch locally. Transfers are not too frequent and the branch ambience suits the locality as well. This ensures that the borrower enjoys the benefits of familiarity, besides the service of employees fluent in the local language and customs. That makes it easier for him/her to interact and clear their doubts.
The gold loan NBFC, ultimately, has only one business: Making loans against gold. That is its bread and butter. The potential gold loan customer can, therefore, be confident about being given quality service by trained and customer-centric employees. They can also be assured of the confidentiality of dealings.
Banks, by virtue of being the custodians of savings and current account deposits as well as float funds from remittances and clearing, have a considerable volume of low-cost money at their disposal. This keeps their cost of funds low. In addition, they are eligible for interest subvention on account of certain categories of priority sector advances. All these enable them to extend gold loans at relatively low interest rates.
Since gold loan NBFCs raise their funds through various other means, for which they have to pay a higher price, and gold loan making, which is labour-intensive, is their main business, they have to charge a higher rate to run a profitable business and ensure returns for all stakeholders.
Customers who approach gold loan NBFCs are aware of this higher cost. They are additionally aware that gold loans through NBFCs also require the necessary KYC documentation. Yet, many borrowers are willing to approach the NBFC in preference to banks. There are reasons for that.
Banks charge processing fees and also jewel appraisers’ fee. Since appraising is done by a professional appraiser, the loans can also be extended only when he is available. Besides, for a bank, gold loan is only one among its many businesses.
Till recently, it was not a preferred mode of lending in view of the various difficulties involved – including the high security and care required in the preservation of the collateral.
When a borrower approaches a lender, he calculates the costs not only in terms of interest, but also in terms of all the elements listed above. Many borrowers from gold NBFCs are migrants from pawnbrokers. For them, the rates charged by the NBFCs are considerably lower. The others that come weigh all the benefits of the NBFC experience against that at a busy bank branch.
They, quite naturally then, opt for the NBFCs.
(The author is Managing Director of Muthoot Finance Ltd.)