Gold Loan Market in India: Overview, History, Growth Factors

Banks and non-banking finance companies (NBFCs) typically lend against a security. This can be a physical asset of value like property or easily tradeable precious metals such as gold or silver, and also other business assets, for example, shares of publicly traded companies.

The ease of carrying and using gold as a mode of exchange-and indeed as a dependable security of value-has allowed moneylenders lending against gold to proliferate for centuries.

Even before a formal banking system developed, villages and small towns had their network of local moneylenders, who built their business largely on the basis of lending the currency of the time against gold jewellery or even utensils.

Although seen as an alternative mode of lending, the gold loans industry has grown significantly over the last couple of decades to become a key part of the organized lending ecosystem.

The rising price of gold allows borrowers to avail larger sums as loans. It also gives comfort to the lenders due to the relative security of the yellow metal. These are among the key factors behind the growth of the industry.

The ease with which one can temporarily monetize the gold jewellery sitting in the cupboards at home, along with aggressive marketing by specialized gold loan companies, has helped the industry clock high double-digit growth through the years.

Banks Versus NBFCs

For banks, the gold loan business is one of the several modes of lending. However, NBFCs have been offering the product to the public for meeting personal and also business loans for entrepreneurs, for a short period.

Broadly, even with the reach and branding of banks, the NBFCs have been a bigger driver of gold loans in the country. Almost two-thirds of around Rs 2 lakh crore worth of gold loans business is under private finance companies.

Uses Of Gold Loans

A borrower doesn’t have any restrictions on the end use of the gold loan. Unlike a fixed mortgage product like a home loan, where the money is lent and disbursed to the seller of the property directly, in the case of a gold loan, just like a personal loan, one is free to use the loan amount for either:

• Personal use, such as children’s education, weddings or going on vacation.
• Business needs such as expansion, arranging working capital or managing cash flows.

Often, a person getting into a small business needs a loan but does not own a personal house to mortgage. However, given the age-old love affair of Indian households and the tradition of festivals and marriages where gold jewellery is bought or gifted, many people have accumulated some gold jewellery. This comes in handy as a mode of security against which one can borrow money.

Demand And Growth Factors

The fate of the industry is largely driven by the price of gold as the amount one can borrow is dependent on that. And the secular long-term trend of the rising price of the yellow metal has bolstered the industry.

Demand for gold loans from small business owners and individuals is also dependent on the general state of the economy. So, in the April-June period last year, when the second wave of the pandemic had a brutal impact on people and the ensuing lockdowns also took a toll, there was a contraction in gold loan disbursals.

However, there was a strong bounce-back in the latter half of 2021, especially in the festive season.

According to Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer at CRISIL Ratings: “Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal (FY22) after a dismal first quarter. Gold loans will continue to be a sought-after asset class, while lenders will remain cautious about growth in many other retail asset classes.”

Expanding Gold Loan Market

Industry estimates show that until 2011, as much as 1,81,881 tones of gold had been mined in all of human history. Of this, just over half-52% to be exact-was in the form of gold jewellery.

In 2017, the World Gold Council estimated that Indian households held between 24,000 and 25,000 metric tones of gold. In 2019, this gold was estimated to be worth as much as 40% of the country’s Gross Domestic Product (GDP).

Even more interesting is the fact that rural India accounts for 65% of the total estimated gold holdings in the country. This is the scale of wealth locked up in India’s household gold, which could be put to good use.

If we consider the latest data for bank loans against gold jewellery, the quantum of credit has shot up from around Rs 34,000 crore at the end of March 2020 to nearly Rs 61,000 crore in 2020-21—the first year of the pandemic. It then rose again by a fifth to around Rs 74,000 crore at the end of March 2022.

This growth comes at a time when the total personal loans market grew in the 10-12% range over the last two years. Over a two-year horizon, the gold loans market grew five times faster than the overall personal loans granted by all banks put together.

These trends are similar for NBFCs, too, who have a larger chunk of the fast-growing gold loan pie.

That said, there is still immense scope of growth as gold loans comprise just around 2% of the total personal loans under bank credit. This has almost doubled as a proportion over the last two years and is one of the fastest growing modes of lending in India.

Conclusion

Lending against gold has been the fastest-growing personal loan segment thanks to the ease of getting short-term loans on reasonable terms. An aggressive push by private lenders have added pace to the industry, especially in the last two years. NBFCs like IIFL Finance remain the main drivers of the business.