The yellow metal’s phenomenal jump in valuation, steady interest rates and instant sanctions of loans, aided by the receding stigma of borrowing are driving more and more people to take this loan route

The loans-against-gold business has achieved much traction in recent years and players in the industry are reaping rich rewards for their efforts. NBFCs, especially, have witnessed exponential growth riding on the gold wave. Prominent among these are players like Muthoot Finance, Muthoot Fincorp (the two entities are separate) and Manappuram Finance. The organised gold loan market in India grew at a Compounded Annual Growth Rate (CAGR) of around 38% in between 2002 and 2009 (according to ICRA Management Consulting Services) and is expected to grow at an annual rate of 35%-40% over the next three years. What is behind these phenomenal growth rates?

It has a lot to do with the fact that more and more Indians are shedding their inhibitions about borrowing against gold and the phenomenal rise in the value of the yellow metal over the past few years that makes gold owners feel richer.

Traditionally, taking a loan against gold was thought of as a measure of last resort, when one was in dire need of emergency funds. The attitude prevented people from making good use of their jewellery and ornaments. However, according to gold loan companies, that notion is fast fading from the minds of the public and more people are now open to the idea of borrowing against gold. Gold finance companies are now trying to convince Indians that pledging gold is actually a smart decision and not just a last resort.

The record surge in gold prices in the past two-three years has helped create fortunes for these NBFCs. Buoyed by the high valuations on their gold holdings, Indian households, both urban and rural, are looking to raise money against them.

DK Joshi, chief economist at CRISIL said, "Gold is a captive resource for the people. So why not leverage it when you can? Although borrowing against gold still remains a measure of last resort, people are learning to take some risk and extract value from it."

Kuljeet Kataria, head-commodities, Motilal Oswal Financial Services believes, "People are now borrowing more against gold given the uncertainty in overall markets. Over the past five years, gold prices have moved to another zone altogether. Gold finance companies have found earning opportunities from this lucrative business."

Atul Shah, head-commodities, Emkay Global Financial Services agrees that gold valuations have helped spruce up demand for such loans. "Gold prices have seen 20%-25% appreciation over the past few years. Companies that are lending against gold also have a safety of margin due to this price rise." 

Interest rates on gold loans are competitive when compared to personal loans, since such loans are only for the short term and offer collateral for the lender. Typically, rates charged vary between 12%-14%, depending upon the purity of the gold. The loan amount sanctioned depends upon the weight of the pledged gold, and can go as high as Rs15 lakh.

What makes gold loans more accessible to the public is the speed of processing of the loan request and the minimal documentation required. Whereas a regular loan can take up to a week for approval, NBFCs like Muthoot Finance and Manappuram Finance sanction gold loans within 30 minutes.

NBFCs continue to dominate this category of lending. Manappuram Finance has nearly Rs2,600 crore as assets under management (AUM) as on March 2010 while Muthoot Finance has an asset base of around Rs9,000 crore. Manappuram is the only gold finance NBFC currently listed. These NBFCs took roots in Kerala, from where they expanded into Tamil Nadu, Andhra Pradesh and Karnataka and are now all over the country, especially eastern India. But south India continues to account for 85%-90% of the gold loan market in India.

Some prominent banks in the country have also entered the business of gold loans, though not in the same aggressive manner. Among the private banks, HDFC Bank, ICICI Bank and Lakshmi Vilas Bank have an exposure to gold loans. Among the government banks, Central Bank of India, Indian Overseas Bank, Development Credit Bank, State Bank of Indore, State Bank of Hyderabad and Syndicate Bank are prominent players.

However, organised lenders like banks and NBFCs still have a long way to go before they break ground against the local moneylenders and pawnbrokers who still hold sway in local markets. Consider this: the unorganised sector still accounts for 75% of the overall gold loan market in India, while the rural population holds over 60% of the country's gold stockpile. So, although India as a whole currently holds around 15,000 tonnes of gold, a sizeable chunk of it remains out of the domain of the organised sector, which can otherwise bring it into the mainstream financial system.