From solid gold to liquid cash: the alchemy of ‘gold loans’

Looking to become financially independent after a divorce, Jyotsna Naik, 27, from suburban Mumbai, wanted to set up a beauty parlour. But her entrepreneurial journey faltered at the very first hurdle because she could not get a bank loan at all.

Most lenders rejected her on the grounds that she was ineligible for an unsecured loan (typically a personal loan) or that she had no credit score.

A desperate Naik then took up her only savings—her gold jewellery, worth about ₹2 lakh, which her late mother had given for her marriage——and raised a loan against them with a neighbourhood jeweller.

She was able to secure a loan up to 100 per cent of the value of the jewellery, but it came at an usurious rate of 40 per cent. Today, most of Naik’s earnings go into repaying the loan.

Like Naik, there are millions of people in urban India and in smaller cities, for whom the unorganised gold-loan market intermediaries, such as the one she accessed, provide the only source of liquidity in emergency situations.

But they pay a very high cost, and often fall prey to unauthorised moneylenders.

According to industry players and reports, about 75 per cent of the gold-loan market is made up of unorganised players, who typically exploit those who are desperate for cash by charging high interest rates.

A deeper, wider market But winds of change are now blowing across this sector. Most public and private sector banks now offer gold loan products, along with a few organised gold loan NBFCs such as Manappuram, Muthoot and Bajaj Finserve, to help organise this sector and unlock the value of thousands of tonnes of the precious yellow metal stashed away by Indians either at home or in bank lockers.

BusinessLine spoke with several banks and NBFCs to understand how gold loan schemes work and how they vary from one entity to another, and whether it is advisable to avail of a gold loan instead of a personal loan.

“Gold loans are the most sought-after and easily accessible leverage mechanism for the middle-income group in rural and urban India,” said A Shankar, Senior Vice President, SME and Rural Banking at Lakshmi Vilas Bank. “The growth in this segment has been steady, and we plan to grow more in the busy season ahead.”

Much of the credit for the expansion in this market segment goes to NBFCs like Muthoot and Manappuram, who created an organised market for loans against gold jewellery about a decade ago. Nevertheless, it is the recent entry of banks that has ushered in greater transparency and trust to the segment and provided depth to the market. In addition, what has enhanced the appeal of gold loans is the fact that they come at low interest rates, with zero-documentation process, faster processing and the promise of security for the gold that is offered as collateral.

The ‘gold loan’ rush An ICICI Bank executive, whom BusinessLine called to seek details of the bank’s gold loan, said that the demand for these loans was on the rise. He even insisted that this reporter avail herself of a loan, and claimed that ICICI Bank offers the lowest interest rate. A HDFC bank executive was equally persuasive, claiming that the bank offered special, attractive rates for women and that the loan could be processed in just 45 minutes. Topping that, a Muthoot executive said the NBFC would disburse the loan over the counter in a matter of seconds!

The interest rates and processing fees charged by most banks are more or less similar. The rates range between 12 and 14 per cent, with an additional processing fee of 0.1 to 2 per cent of the loan amount. The NBFCs, on the other hand, charge an interest rate of 18 to 26 per cent, along with a processing fee of ₹200-500. A back-of-the-envelope calculation establishes that loans from NBFCs are a tad more expensive than those offered by banks.

Most banks and NBFCs only accept gold ornaments as collateral. A few also give loans against coins, and even against gold ETFs, while a few others do not accept any gold below 18 carats or jewellery like mangalsutra and gold watches.

Muthoot Finance Chief General Manager KR Bijimon told BusinessLine that gold loans are lately becoming more attractive than personal loans since the former does not require any financial documents or Income Tax documentation to be submitted.

Besides, Bijimon said, the majority of small traders and women opt for gold loans as they are the easiest and fastest way to get finance.

“The South had always dominated the gold loan segment, but we are witnessing traction in the Northern market too,” Bijimon said. “We are conducting campaigns to educate people in that market and trying to remove the stigma attached to gold finance,” he added.

A metal laced with emotion Even today, he said, there is a taboo associated with taking loans against gold, given that it has an emotional value attached to it. Many even consider it something of a “misfortune” to pledge the yellow metal, which is also considered “sacred” by some Indians. Bijimon said Indian households currently hold about 20,000 tonnes of gold, and it is neccessary to unlock the value of that gold and expand the market.

Muthoot, one of the oldest players in the segment, disbursed ₹60,000 crore of gold loans last year and expects a 10-12 per cent increase this year.

According to a World Gold Council report, consumers now prefer to pledge jewellery or bullion to raise funds rather than sell them, and that around 1,250 tonnes were used as collateral, largely with informal lenders, such as pawnbrokers, last year.

Formal lenders’ prospects The WGC report states that gold loans offered by institutional players will continue to hold a substantial market share in India, given the government’s policy efforts to nudge consumers towards the formal sector. Currently, that sector accounts for only 25 per cent of the gold loan market; within that segment, one half is accounted for by banks, while the two NBFCs—Muthoot and Manappuram—account for much of the other half, experts reckon.

Lately, even consumers realise that it is easier to avail of a gold loan than a personal loan since there is no need to establish proof of income; gold loans also don’t lead to a bad credit score and can be processed easily and one can get a loan up to 80 per cent of the market value of the gold. The RBI has capped the loan value at 75 per cent for organised players, but NBFCs typically abide by a lower ceiling.

A recent report by rating agency Crisil stated that the profitability of large gold loan financiers surged back to the peak levels seen before the regulatory tightening, which started in 2012.

Krishnan Sitaraman, Senior Director, CRISIL Ratings, said, “Periodic interest collection has ensured the loan-to-value ratio remains intact and gold price declines do not result in interest loss, which was a key reason for reduced profitability in the preceding few years. It also reduces the chances of delinquency as the borrower’s equity in the pledged gold does not fall.”

The other key reason for improved profitability is the shortened loan tenure. Increasingly, loans are disbursed with tenures of 3-9 months as against 12 months earlier. This enables financiers to react swiftly to any decline in gold price. Under RBI norms, gold pledged by delinquent borrowers can be auctioned only after following the due process. A shorter maturity period helps the lender auction the gold sooner, if the need arises.

The rising demand for gold loans has prompted new-age small payments banks such as Paytm and Fino to tie up with bigger banks to provide loans to customers and even non-customers.

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