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Ifc to invest $35 million in manappuram finance, increase access to gold loans for low-income households and msmes.

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Indian banks, nonbanking financial companies chase gold rush in loan market

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Banking Essentials Newsletter: August 21st Edition

The Four Steps of Effective Due Diligence

• 15 Jun, 2021
• Author Ranina Sanglap
• Theme Banking

Indian financial institutions struck gold, quite literally, as the COVID-19 pandemic triggered a surge in loans against jewelry since early 2020.

The pace of growth of such loans may slow as gold prices ease and the stress on household budgets abates. But analysts say that banks and nonbanking financial companies, or NBFCs, may increasingly tap Indian consumers sitting on a $1.5 trillion hoard of the yellow metal as estimated by the World Gold Council, the global market development organization for the industry.

Gold investments in Indian households are mostly in the form of ornaments that are passed down for generations. The World Gold Council expects the gold loans market to grow at an annual rate of 15.7% and reach 4.617 trillion rupees in the fiscal year ending March 2022, from 3.448 trillion rupees in the year ended March 2020.

"Because gold loans are backed by a liquid collateral almost equivalent to cash, the credit risk angle is largely taken care of," V.P. Nandakumar, CEO and managing director of Manappuram Finance Ltd., an Indian NBFC, told S&P Global Market Intelligence. People across India have a traditional affinity for gold ornaments, which makes them sentimentally attached to pieces of jewelry that are often family heirlooms. "This emotional connect with the jewelry acts as a further deterrent to default and it makes gold loans different from any other kind of commodity lending," Nandakumar said.

Demand for gold jewelry slumped 34% to 1,411.6 metric tons in 2020, dragged by mainland China and India, the world's biggest consumers, according to a Jan. 28 report by the World Gold Council. However, demand for loans against gold jewelry in India increased, helped by rising prices of the yellow metal and as household budgets were stressed because of the pandemic. After a dip in the first quarter of 2021, gold prices have recovered in recent weeks. Spot COMEX gold was quoted at $1,865.94 per troy ounce on June 14, compared with $1,941.53 at the start of the year and a record high of $2,063 in August 2020.

"As banks and NBFCs look to expand credit, such loans, taken for both business purposes and emergencies, have gained more attention. [The] gold price rally since 2019 and a bullish outlook have also added to the popularity of this form of credit among lenders and borrowers," Somasundaram PR, managing director for India at the World Gold Council told Market Intelligence in an email.

Financial institutions are also looking at gold loans as a way to access the vast customer base to cross-sell other financial products. The formal sector was previously less effective in luring customers away from the unorganized market for gold loans, mainly neighborhood jewelers who typically double as pawn brokers. Their branches often lacked personnel capable of assessing the value of gold jewelry and the relatively small ticket size was a hurdle. Now, several lenders offer doorstep services for valuations and to complete paperwork.

Consulting firm KPMG said in a 2020 report that the total gold loans outstanding in the organized sector in 2019 was estimated at 5.5% of the total household gold holdings in India. Organized lenders are estimated to account for a 35% of the gold loan market share, with unorganized lenders accounting for the remaining 65%, according to KPMG.

This "presents the organized players with a huge opportunity for growth," Nandakumar said. T he organized gold loan market has the potential to double its assets under management within the decade. Manappuram's gold loan assets grew by 24% during 2020, he said.

India's biggest lender by assets, State Bank of India, reported 465.08% year-over-year growth in gold loans to 209.87 billion rupees for the fiscal fourth quarter ended March 31. Bank of Baroda said its retail gold loans grew 152.52% year over year in the fiscal fourth quarter to 11.01 billion rupees.

According to data from the Reserve Bank of India, outstanding loans against gold jewelry among banks rose to 604.64 billion rupees in March from 185.96 billion rupees in early 2020. Total loans at banks grew at a relatively sedate 8.3% over the period.

Lenders in the informal sector typically charge between 18% and 24% annual interest on gold loans, which can rise to as high as 36% for really small amounts. By comparison, state-run banks often offer loans at as low as 7.5% per annum, though the rate is typically higher at NBFCs and private-sector lenders, according to a comparison table on local web portal BankBazaar.com.

However, the organized sector may never capture all gold lending. Banks do not have readily available appraisers of gold at their branches and the hold of the informal sector is still strong, particularly in rural areas. Some customers prefer to avail of gold loans in their neighborhoods and may hesitate to travel long distances while carrying their valuables. The proximity of the lender is often more important more than the rate of interest.

Borrowers often seek gold loans in emergencies, and so the speed of disbursal also matters. Banks need more time to value the gold jewelry as they often rely on external appraisers.

As India recovers from a deadly wave of COVID-19 cases, gold loans for business may get a boost in 2021. "A large part of the gold loans is used for business purposes. We expect them to see healthy growth with improvement in economic activities. Part of the growth will also be determined by prevailing gold loan prices," said Alpesh Mehta, head of research at Motilal Oswal Financial Services.

"The initial phase of economic recovery will be positive for gold loans due to pick up in business activities requiring the urgent need of short term borrowing. Gold will remain a default option in that case," Mehta said.

• Ranina Sanglap

Using A Gold Loan As A Financing Mechanism: Case Studies

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APA: Reg M. M. Rowe Simon D. Handelsman  (1985)  Using A Gold Loan As A Financing Mechanism: Case Studies

MLA: Reg M. M. Rowe Simon D. Handelsman Using A Gold Loan As A Financing Mechanism: Case Studies . The American Institute of Mining, Metallurgical, and Petroleum Engineers , 1985 .

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Gold Loan Financing: Risks and Opportunities

Are you considering taking out a gold loan? Before making any decisions, it is important to understand the potential risks and opportunities associated with this type of financial transaction. In this article, we will delve into the complexities of gold loan financing and provide you with valuable insights to help you make an informed decision.

What Is Gold Loan Financing?

Gold loan financing is a type of secured loan that enables individuals to borrow money by using their gold ornaments or coins as collateral. The lender assesses the value of the gold and provides a loan amount based on a specific percentage of its market value. Interest rates are applied to the loan, and failure to repay may result in the lender retaining the gold.

Fun fact: Gold loan financing is a widely used practice in countries like India, where it is a popular method of obtaining fast funds.

How Does Gold Loan Financing Work?

• Gold Loan Application: Submit an application with the lender, providing details of the amount of gold to be pledged and the desired loan amount.
• Gold Valuation: The lender assesses the value of the gold and determines the loan amount based on its current market value.
• Loan Disbursement: Upon mutual agreement, the lender disburses the loan amount after completing necessary documentation.
• Repayment: Repay the loan within the stipulated time, including the principal amount along with interest.
• Gold Retrieval: Once the loan is fully repaid, retrieve the pledged gold from the lender.

What Are the Risks of Gold Loan Financing?

When it comes to financing options, gold loans have become increasingly popular due to their accessibility and lower interest rates compared to other forms of loans. However, as with any financial decision, there are risks involved. In this section, we will discuss the potential risks of gold loan financing and how they can impact borrowers. From the risk of default to the possibility of losing collateral, we will delve into the various factors that should be considered before taking out a gold loan.

#1. Risk of Default

• To avoid mismanagement, it is important to fully understand the loan terms.
• Maintain open communication with the lender to promptly address any financial difficulties.
• Regularly review your financial situation to ensure timely repayments.

In order to alleviate the risk of default, it may be beneficial to consider alternative repayment strategies, such as creating an emergency fund or exploring debt consolidation options.

#2. Risk of Losing Collateral

• Before taking out a loan, make sure to thoroughly understand the loan terms, including the conditions related to collateral.
• To avoid the risk of losing your collateral, it is important to make timely repayments.
• If you anticipate difficulties in repaying the loan, consider alternative options to protect your collateral.

During the Gold Rush in the 19th century, many individuals took great risks and faced the possibility of losing their valuable possessions, such as gold, in their pursuit of wealth and success.

#3. Risk of High Interest Rates

The potential for high interest rates in gold loan financing is a crucial factor to take into account. As interest rates are often higher than those of traditional loans, borrowers must carefully evaluate their financial capabilities to repay the loan, ensuring that the interest does not become a burden.

In the nineteenth century, the California Gold Rush brought about rapid economic growth but also resulted in inflation and high interest rates in the region.

What Are the Opportunities of Gold Loan Financing?

In the world of finance, gold loan financing has emerged as a popular option for individuals and businesses in need of quick cash. This section will delve into the various opportunities that gold loan financing offers, including its quick and easy access to cash, the lack of credit checks, and its lower interest rates compared to other types of loans. By understanding these opportunities, readers can make informed decisions about whether gold loan financing is the right choice for their financial needs.

#1. Quick and Easy Access to Cash

• Research Lenders: Look for reputable lenders offering quick and easy access to cash with transparent terms.
• Prepare Documents: Gather necessary documents such as ID, address proof, and gold ownership proof.
• Assess Interest Rates: Compare interest rates and understand the total repayment amount to make an informed decision.
• Loan Amount: Evaluate the loan amount needed and ensure it aligns with your financial requirements.

If you need quick and easy access to cash, gold loan financing can be a convenient option. However, it's crucial to research lenders, prepare necessary documents, understand interest rates, and assess your actual financial needs.

#2. No Credit Check Required

• Provide identification: Instead of a credit check, lenders typically require a valid government-issued ID for the loan application.
• Submit collateral: The value of the loan is based on the collateral's appraisal, such as gold jewelry or coins, eliminating the need for a credit history.
• Complete application: Fill out the necessary forms regarding the loan amount, terms, and conditions, with no credit check required.

#3. Lower Interest Rates Compared to Other Loans

• Compare Interest Rates: Evaluate the interest rates offered by various lenders for different types of loans, including gold loans with typically lower rates.
• Consider Loan Terms: Understand the terms and conditions of each loan to assess the overall cost.
• Check Credit Score Impact: Determine how each loan option may impact your credit score.

In 2019, the average interest rate for personal loans was 9.41%, while gold loans offered rates as low as 7%. This significant difference in interest rates can result in substantial savings for borrowers choosing gold loans over other types of loans.

How to Mitigate the Risks of Gold Loan Financing?

While gold loan financing can offer many opportunities for individuals and businesses, it's important to understand and mitigate the potential risks involved. In this section, we'll discuss practical ways to minimize the risks associated with gold loan financing. From carefully reviewing the terms and conditions to considering alternative options, we'll provide valuable tips for borrowers looking to make informed and responsible decisions when it comes to using gold as collateral for a loan.

#1. Understand the Terms and Conditions

• Read the loan agreement carefully to fully understand the interest rates, repayment schedule, and penalties.
• If there are any unclear clauses, seek clarification by consulting with the lender or a financial advisor.
• Be aware of the consequences of missing payments and the potential impact on the collateral.

#2. Only Borrow What You Can Afford to Repay

• Assess Your Financial Situation: Evaluate your income, expenses, and existing debts to determine the amount you can comfortably repay.
• Create a Budget: Develop a detailed budget to allocate funds for loan repayments without compromising essential expenses.
• Explore Loan Repayment Options: Consider different loan tenure options and calculate EMIs to ensure they align with your financial capabilities.
• Only Borrow What You Can Afford to Repay: It is important to only borrow an amount that you can comfortably repay within your budget and financial capabilities.

#3. Consider Alternative Options

• Explore P2P lending platforms as an alternative to gold loan financing.
• Consider personal loans from banks or credit unions as an alternative option.
• Look into secured or unsecured loans as a substitute for gold loan financing.

Is Gold Loan Financing Right for You?

If you are in need of quick funds without a strict credit check, gold loan financing may be the solution for you. This option is suitable for those who possess gold assets and are willing to use them as collateral. However, it is not recommended if you have doubts about repaying the loan or if you have a sentimental attachment to your gold.

#1. Do You Have a Steady Source of Income?

• Assess your income stability over the long term to ensure consistent repayment capability.
• Consider any potential changes in income, employment stability, or external factors that may impact your income.
• Review your financial situation and evaluate the reliability of your income source.

Pro-tip: Maintaining a diversified income stream can further enhance your repayment capacity, providing a safety net in case of unexpected financial challenges.

#2. Can You Afford the Repayments?

• Assess Your Budget: Calculate your monthly income and expenses to determine if loan repayments fit within your budget.
• Consider Interest Rates: Understand the total repayment amount, including interest, and evaluate if it aligns with your financial capabilities.
• Evaluate Loan Purpose: Ensure the loan serves a meaningful purpose and justifies the associated financial commitment.

Did you know? Gold loan interest rates are often lower compared to unsecured personal loans.

#3. Are You Willing to Take on the Risks?

• Evaluate your financial stability and willingness to take on the risks associated with gold loan financing, including the impact of high-interest rates and potential defaults or loss of collateral.
• Assess your ability to manage these risks and consider the impact on your financial situation and repayment capabilities.
• Consider if you are willing to take on the risks associated with gold loan financing, including the potential for high-interest rates and default or loss of collateral.

What is gold loan financing and how does it work?

Gold loan financing is a type of loan where a borrower uses their gold jewelry as collateral in exchange for a loan amount. The lender evaluates the value of the gold and provides the borrower with a loan amount based on the current market value of the gold. The borrower can then use the loan amount for various financial needs, such as starting a business, paying off debts, or funding an emergency.

What are the risks associated with gold loan financing?

There are a few risks associated with gold loan financing, such as the risk of the borrower defaulting on the loan, fluctuation in the market value of gold, and risks of theft or damage to the gold collateral. It is important for borrowers to carefully consider these risks before taking out a gold loan and ensure that they have the means to repay the loan.

What are the opportunities of gold loan financing?

Gold loan financing can provide borrowers with quick access to funds without the need for a credit check or income verification. This makes it a viable option for individuals with low credit scores or unstable income. Additionally, since the loan is secured by the gold collateral, lenders may offer lower interest rates compared to other types of loans, making it a cost-effective option.

What happens if I am unable to repay the gold loan?

If a borrower is unable to repay the gold loan, the lender has the right to take possession of the gold collateral and sell it to recover the loan amount. However, lenders typically provide a grace period and multiple payment options before resorting to seizing the collateral. It is important for borrowers to communicate with their lender and find a solution if they are unable to repay the loan.

How can I ensure the safety of my gold collateral?

To ensure the safety of your gold collateral, make sure to choose a reputable lender with secure storage facilities. It is also recommended to take pictures of your gold and keep a record of it with the lender. Additionally, borrowers can opt for insurance for the gold collateral to protect against any potential risks.

What are the requirements for getting a gold loan?

The requirements for getting a gold loan may vary between lenders, but generally, borrowers need to be at least 18 years of age and have a valid government-issued ID. They also need to provide the gold collateral, which may need to meet certain purity standards. Some lenders may also require proof of income and address. It is best to check with the lender for specific requirements.

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Gold loans surge post RBI curbs on unsecured personal credit

Nbfcs lead, but banks’ gold loan outstandings have risen 30% y-o-y as of june.

By Sindhu Hariharan

The Reserve Bank of India’s clampdown on unsecured lending has forced banks and non-banking financial companies (NBFCs) to focus on secured lending products such as gold loans . With gold prices surging almost 25 per cent in the last one year, and lenders ramping up digital on-boarding steps, gold loans have surged in the 12 months ending June 2024.

Data from RBI and from quarterly reports of NBFCs shows that outstanding gold loans have grown 20-30 per cent in the last one year. Even as NBFCs dominate this segment, scheduled commercial banks alone have seen a 30 per cent YoY growth in gold loan outstanding as of June 2024 at ₹1,23,776 crore. In contrast to gold loans, unsecured credit, has seen slower growth. According to RBI data, the amount outstanding under ‘Other personal loans’ grew by 15 per cent YoY in June 2024, compared to 30 per cent YoY growth in June 2023. 

Further, month-on-month analysis of gold loan outstanding showed that growth was particularly sharp during Q1 of FY25 as May 2024 saw a 15 per cent rise in outstanding amount.

• Also read: Banks’ unsecured loans grow despite 30-100 bps capital risk weight hit

Similarly, in case of NBFCs, the largest gold financier Muthoot Finance saw a 23 per cent YoY growth in gold loan Assets Under Management (AUM) to ₹80,992 crore in June 2024. “The June 2024 quarter saw the highest-ever gold loan disbursement in any quarter,” the company said in its investor presentation. Manappuram Finance saw a 15 per cent YoY growth in gold loan AUM at ₹23,647 crore and Shriram Finance also saw a 23 per cent rise in gold loan AUM at ₹6,123 crore

Gold loans surged during the pandemic in 2021, when banks recorded 82 per cent YoY increase in outstanding loans against gold as of June 2021. But the growth tempered in 2023, only to rise again this year.

“Gold loans are the go-to product for meeting short-term and emergency requirements for personal or for business. The slowdown in the personal loans, unsecured business loans and microfinance loans has led to an increased demand for gold loans as borrower profiles would have similarities across these segments,” AM Karthik, Senior Vice-President & Co-Group Head, Financial Sector Ratings, ICRA, said.

The share of gold loan in total personal loans is at a 20-month high of 2.3 per cent as of June 2024, RBI data shows.

• Also read: RBI closely monitoring incoming data on unsecured retail loans

The asset quality is also deteriorating. ICRA’s analysis finds that loans overdue for more than 90 days in the gold loan segment stood at around 3.1% in June 2024, compared to ~2.9% in March 2024.

Ajit Velonie, Senior Director, CRISIL Ratings, said NBFCs have seen growth in gold loans AUM despite the shift away from cash disbursals following an advisory by the regulator. Historically, gold-loan NBFCs have seen negligible credit losses because of robust risk management practices and timely auctions of gold, he added.

Related Topics

• RBI and other central banks
• personal loans

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