India’s Gold Loan Sector - Organised Vs Unorganised
Published: Feb 06, 2023
Today, if faced with a sudden need for money, a person can quite conveniently apply for a gold loan from an NBFC or bank and get the necessary funds disbursed almost immediately. People can even apply for a gold loan online, from the comfort of their homes. The widespread adoption of technology in recent times has played a significant role in the growth of the country’s gold loan market, which saw a 102% rise in loan disbursals between 2019 and 2020. The first quarter of 2022 saw the uptake of gold loans more than double, from Rs 608 crores to Rs 1,333 crores [Source] which can be attributed to greater awareness as well as the digital transformation that industries are undergoing.
Uses of a Gold Loan
Whether taken from a lender, bank or NBFC, a gold loan has no restrictions on the end use of the money that is borrowed. Gold loans can be availed for personal needs like children’s education or weddings or for going on a vacation, as well as for meeting business requirements like arranging working capital, expansion, etc. Gold loans have proved to be a highly preferred financial solution over time.
The Gold Loan Market in India
The gold loan market in India has been growing gradually over the years along with the demand for gold loans, coming from individuals as well as businesses. This growth can be attributed to the many advantages offered by the banks and NBFC gold loan companies in India, like easy availability, minimal eligibility criteria attractive gold loan interest rates, flexible repayments, and minimal documentation. While banks have been offering gold loans for years now, it was the establishment of the top gold loan companies in India that turned out to be the bigger driver of market growth. In 2022, the asset under management for gold loans by NBFCs and private gold loan companies in India was about 156.8 crore rupees, which forms about 24% of the formal gold loan market [Source]. Despite the huge numbers and the expansive scope, the formal or organised sector is not the only player in the gold loan market, as the unorganised sector still holds a major share today.
The Unorganised Gold Loan Market
For years and years, gold loans have been availed by people from all sections of society by pawn brokers and lenders. These lenders, having local market knowledge, provide quick funds with almost no documentation and are notoriously known for the exorbitant interest rates they tend to charge. The unorganised sector is completely unregulated and involves many risks but being among the oldest and most widespread of the sectors, to date, holds more than 60% of the entire gold loan market.
The Perils of the Unorganised Gold Loan Market
●High Rates of Interest: Lack of regulation leaves borrowers susceptible to exploitation. At a bank or a private gold loan company, the interest rate will generally vary from 7 to 25%, whereas local lenders have been known to ask for anything from 25 to 50% as interest.
●Lack of Assurance of Getting Pledged Asset Back: Standard processes, ample grace periods, and transparency at banks and private gold loan companies in India provide the required assurance that the pledged asset will be safe and will be returned to the borrower on complete repayment. However, local money lenders (not all) are much less accountable for the collateral.
●Dubious Gold Valuation: The organised section has genuine valuation procedures for gold. However, as the amount of money you can borrow depends largely on the value of the gold, taking borrowers for a ride by quoting low values is quite common in the unorganised sector.
●No Clarity Regarding LTV: Banks and NBFC gold loan companies in India have fixed LTVs that people can avail against gold. On the other hand, in the unorganised sector, it is more often than not the whim of the lender to decide how much they will offer.
The Organised Gold Loan Market
The organised sector mainly includes banks, Non-Banking Financial Companies (NBFCs), and Nidhi companies, where the first two are governed by the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs is responsible for the regulation of Nidhi Companies. The specialised gold loan NBFCs in India have helped significantly in the consolidation of the market, capturing a major chunk of new-to-market customers, as they consistently directed their efforts towards aggressive branding investments, promotions, and expansions. NBFC gold loan companies in India have transformed the market, bringing in several new advantages like faster processing times, accurate valuation, flexibility, varying gold loan formats and repayment options, safekeeping, and auction processes.
Tabular Representation
Gold Loan Offerings in India
Parameter
Gold Loan NBFC
Bank
Moneylenders/ Pawn Brokers
LTV
Up to 75-90%
Up to 75-90%
Not Set
Associated Fees
Processing Fee: Nil or Minimal Appraisal Fee: Nil
Small Ticket Loans Processing Fee: Nil Appraisal Fee: Nil to Minimal High Ticket Loans Both Processing & Appraisal Fees are Charged
No Fees
Rate of Interest
11-24% pa
7-15% pa
25-50% pa
Disbursal
Up to Rs 20000: Cash >20000: Account Transfer
Must have an Account in the Same Bank, Where Money Will Also be Disbursed
Cash
Regulatory
RBI [Nidhi Companies are Regulated by the MCA]
RBI
Unregulated
TAT
Within Minutes
1-2 Hours
10-15 Minutes
The Outlook
The many banks and gold loan companies in India have a decent market share at present, however, the market has massive scope for further growth. While the introduction of online schemes and the recent emergence of small finance banks and Nidhi companies is contributing to growth already, the organised sector needs to unlock the potential of untapped markets. Geographical expansion is key at the moment. However, seeing the market as it stands today and given the consistent efforts of the many gold loan companies in India, the future of the organised gold loan market appears quite bright.