Gold loan AUMs to grow by 15-20% in 2020!

 

A demand for gold loans through banks & NBFCs 

In their Market Update for the November 2020 World Gold Council (WGC) published, Gold loans help India weather the Covid-19 storm. At the occasion Somasundaram PR, Managing Director, India, WGC said, “The gold loan industry has traditionally been a pillar of support for small businesses and households in need of emergency short term assistance. 

In addition to unorganized lending that normally co-exists with any robust gold market, the regulated Institutional framework of “gold loans” in India has made it ubiquitous over the past decade which is indeed a boon.  In particular, Covid has boosted demand for gold loans through banks and non-banking financial companies (NBFCs). 

The recent rise was seen some time since July 2019 when prices started moving up sharply. 28.8% rallies in domestic gold price this year and the need for quick credit among small businesses will further spur gold loans’ growth post Covid. Gold loans will benefit not just from the demand side but supply side dynamics too as many banks and non-banking institutions target this product segment on account of its acceptable risk profile. 

India’s leading gold NBFCs expect their gold loan AUMs to grow by 15-20% in the current financial year.  Further branch expansions of gold loan NBFCs and increased adoption of technology makes the growth outlook of the gold loan market look even more promising. 

The market is expected to grow at an annual rate of 15.7% and reach INR 4,617bn in FY 2022 from INR 3,448bn in FY 2020. This report outlines the growth story of gold loan market in India, its regulatory landscape and highlights key trends during Covid-19 with pointers to how technology has enabled greater reach and adoption. 

It discusses how digital offerings in the form of online gold loan (OGL) scheme have seen good traction since their inception. It also shares recommendations on what more can be done to increase penetration of financial inclusion through the gold loan industry. All in all, a good read in the current context.” 

The update report, Gold loans help India weather the Covid-19 storm opens its’ introduction & opens a wider canvas inks, gold occupies a vital place in the hearts and homes of Indian consumers and is often considered as a symbol of social status, financial security, and cultural legacy. 

Households in India are emotionally attached to gold jewellery and prefer to use gold as collateral to meet their financing needs rather than outright selling. For generations, farming communities and rural households have used gold as a means of financing, often pledging it as collateral to raise funds to plant the following year’s crops. Today, gold loans are used to meet the expenditures for health, business, education, and marriage. 

The evolution of the gold loan market began in southern India, in the state of Kerala. Leading Kerala-based gold loan companies, Muthoot Finance and Manappuram Finance, can trace their origins back to 1939 and 1949, respectively. Another Kerala-based gold loan company, Muthoot Fincorp-ventured into the gold loan business in the 1950s. 

Before this time, the gold loan market was mostly informal (loan disbursed by money lenders and pawn brokers) but it started to change after the entrance of banks in the 1960s. The formalisation of the gold loan market gained further momentum when the Reserve Bank of India (RBI) granted a license to Manappuram Finance and Muthoot Finance to work as a NBFC in 1998 and 2001 respectively. 

Gold loans are popular in both urban and rural areas. They compare favourably with personal loans regarding quicker processing time, no requirement of income proof or prior credit history, and low processing fees. With such advantages, the overall gold loan market has grown from INR 600bn (US$12.6bn) in FY 2009-10 to INR 9,000bn (US$122.6bn) in FY 2019-20, a compound annual growth rate (CAGR) of 31.1% over the last decade.