How surge in gold loans is reshaping the market dynamics
Cultural, emotional and financial – these three aspects are the drivers for the continued interest and unique positioning of gold as a commodity in India. Gold jewellery has a sentimental inclination to the Indian populace and is often passed down from one generation to another. At Indian households, revered as a symbol of social status, it is difficult to part ways with the metal even during an economic adversity due to the emotional connect, and the demand for jewellery consumption has been high despite the price rise predominantly due to this reason. Indian families have realised the significance of gold as a family asset, and not a mere ornament and they would still rather pledge them than sell the metal, despite being very liquid. The intrinsic value of gold as an asset can be realised only when it can be a significant source of credit and can be retrieved without losing the attachment.
According to ICRA, the organized gold loan market is expected to reach Rs 15 trillion by March 2027, growing at a compounded annual growth rate (CAGR) of 25%. In fiscal 2023-24, the organised gold loan market demonstrated substantial growth, reaching an AUM of Rs 7.1 lakh crore, according to a recent PwC report. The estimated value of gold holdings with Indian households stands roughly at Rs 126 lakh crore, said the report. The economic value these assets hold is huge and Gold loan enables this asset to be more productive.
Significance of Gold Loan & Contribution to Rural India
The significance of gold loans is on the rise in the country particularly due to its economic significance including financial inclusion especially in the rural segment where credit access is limited, penetrating the geographies reaching the rural market, and enabling the small business owners to meet their working capital requirements when in need. Gold loans are becoming a popular means of raising debt and have been witnessing a surge due to its own features including zero prepayment charges, daily repayment & interest only on outstanding amount, flexibility in repayment, including bullet payment options and many more. The financial institutions have a huge opportunity to tap the untapped markets especially in rural sector where 90% of the market is still estimated to be unexplored. Providing credit access in the rural households, the small business owners, and others, gold loans have played a significant role in the economic development of the rural areas. The ease of access with digital adoption, customised services, hassle free process, lesser documentation and many more have contributed to the growth of gold loan market in the country. This has helped to migrate customers from informal money lenders to formal and regulated entities contributing substantially to financial inclusion and formal economy.
Regulations are key
Gold loans have always been a regulated business and specific regulations from RBI are in place for regulated entities and has been improvised over a period of time. Traditional gold loan companies have always prioritized customer trust, transparency, and risk management. It is important to foster a responsible and transparent financial ecosystem. Time to time guidance and advisory from the Central Bank have been helping the industry grow and empower the business. This has been helping to create and enable a stable environment which is significant for the growth of the sector.
Portfolio performance
Gold Loan is a time-tested portfolio with practically no or minimal credit losses, exhibited for decades together. Traditional Companies have implemented strict checks for gold purity, weight evaluation, and regional LTV normalisation to minimise risks associated with lending against gold. Customer expectations today are varied – from personalised communication, transparency, speed, convenience, tailored solutions and many more, NBFCs are equipped to meet the lifecycle requirements of the customers through their array of customised products and services.
Security & Technology Adoption in Safe Keeping
A time-tested portfolio, the gold loan market is extremely process intense and the loan providers are custodians of trust which is a larger responsibility that goes beyond just a financial transaction. Trust plays a significant role when it comes to customer expectations. A gold loan customer approaches an NBFC significantly because they trust them to keep their golds safe and they are ensured value for their gold. Safety and security of the pledged gold ornaments are of supreme significance for a gold loan NBFC. High security vaults and safes, multi factor authentication to access these vaults, 24/7 CCTV surveillance, alarm systems to trigger any breach of the security systems are significant aspects of physical security measures. Adoption of technology is a critical aspect in providing ample security to the storage and lockers including biometric authentication and others. A well evolved market, Companies have developed good risk management model and organisations specialised in gold loans have been able to manage risk better.
Conclusion
Gold Loan has been a dependable source of access to credit, for the populace especially in rural and semi-urban areas. Gold loan has been a catalyst for financial inclusion and ease of access and regulated process and governance in the country will continue to be the catalyst for economic growth. Traditional Gold Loan focussed NBFCs have developed processes and controls which are time tested for decades together and are improvised continuously.
Breaking the ‘one size fits all’ approach, traditional gold loan players are able to adopt a personalised approach today to meet the customer expectations ensuring scalability and agility across operations while keeping the pillars of trust and compassion intact. An effective combination of technology, well trained human capital specifically for Gold Loan has helped the sector grow with well-developed risk management capabilities.
Gold Loan companies are well prepared to contribute substantially into our ambition to Viksit Bharat by 2047, through active contribution into financial inclusion and supply of small credit, especially in rural and semi urban centres, thus participating in Nation Building.
Source: https://etedge-insights.com/