Here is a short experiment: How many people you know have taken gold loans?
The answer is most probably zero (except you or your family — if you have taken one in the past).
Though it is a massive market, retail investors hardly have an idea about it. Therefore, I thought it would be of great help for our customers to understand how the industry works and what the investment opportunities are for higher returns.
In the article, I will be answering 4 basic questions in detail.
Let’s get started.
How Big Is the Gold Market? How Is it Growing?
India is currently one of the biggest consumers of gold in the world with a cumulative/gross household gold believed to be 25,000 tonnes.
The current Indian gold loan market is ₹ 2.9 Lakh crore, and it is expected to grow 60% by 2022. While this number is enormous, it is still considered low.
The market value of 25,000 tonnes of gold is around ₹ 107 lakh crore, and the market size today is meagre ₹ 2.9 lakh crore. That is just 2.7% penetration! ( Did I just call ₹ 2.9 Lakh crore meagre? Oh, no!).
Why do People Take Gold Loans?
To answer this question, we have analysed another question.
Who are the people that apply for gold loans? If we answer this question, the other answers will automatically come out.
In India, more than 80% of the working population is part of the unorganized sector. They are drivers, carpenters, electricians, plumbers etc. Working in the unorganized sector means there are no regular or fixed incomes.
They mostly get their salaries in cash (not in bank accounts). Thus, they have no income proof. Personal loan or for that matter, any other loan requires a lot of documentation and also has strict credit criteria. On the other hand, taking a gold loan is much simpler.
You can mortgage the gold ornament and you only need to provide your address and identity proof, and you are good to go. There is no requirement to produce income statements, ITR etc.
Let’s be honest, nobody likes paperwork.
Imagine a farmer goes to the bank for a loan and the banker asks him for his income proof, previous months’ bank statement and whatnot. The poor fellow is in an uncomfortable situation and already nervous.
On the opposite end of the spectrum, the same farmer needs to submit only a KYC for the gold loan. No other documentation. It might seem like a little thing, but it makes a tremendous amount of difference. Now, you would ask if there are no additional credit cheques, what if the borrower doesn’t repay? Does the bank lose its money?
Nope! The gold ornament is easily liquidated if the borrower doesn’t pay.
And what if gold prices fall?
The loan amount is never equivalent to the market value of gold ornament. In fact, RBI regulates that the maximum loan amount can be 75% of the market value of the gold that is mortgaged.
This creates a sufficient buffer against gold price fluctuation and makes sure the borrower repays the loan.
NBFC V/s Banks
The gold loan market has grown tremendously since NBFCs have entered into this market because gold loan NBFCs focus only on gold loans and give personalized attention to customers.
Banks have several other things going on and lending gold loans is not their number one priority. It is a valid and vital point but not the primary reason. The reason that NBFCs have succeeded so much is that they have tapped into the minds of the Indian population.
Remember at the start I asked if you know anyone who has taken a gold loan? My guess is the number is zero for most of you. It is such a massive market that is highly unlikely to have someone in your circle that has not taken a gold loan. Yes, that’s right.
It is just that no-one talks about it. Why?
Gold is much more than a piece of metal for Indians. There are emotions attached to every part of the ornament in an Indian household. A gold ring might have been a gift from your better half, and a chain might be a family heirloom.
These are human sentiments. It’s one of the reasons people prefer loans rather than just selling gold. So it’s a tough decision to mortgage gold, and when they decide to do it, they don’t want to be seen doing it. You can find your relative, friend, or a neighbour in your bank’s branch and you will have to explain the scenario to them.
NBFC’s provide a feeling of privacy. If you find any of your friends there, they are also there for the same reason as you are. So that is a sense of comfort for people.
The question you might still be asking is why do people prefer taking gold loans from NBFCs despite having a higher rate of interest. The answer again lies in the people who take gold loans. People in the unorganized sector generally don’t borrow a massive sum of money.
They borrow money in thousands. The difference of 2–3% doesn’t make much difference to them. Also, banks are slow in processing gold loans and might take a day or two extra. For a daily wage worker, going to banks three-four days in a row is not feasible.
NBFC’s provide a quick and comfortable alternative. For example, in one of the gold loan pools, the average ticket size of a gold loan is approximately Rs. 32,000. Now, for a six-month tenure, a 3% additional interest rate means Rs.480, which is what a person would earn in a day or two.
The borrower generally prefers NBFCs which s/he can visit after work hours and get a loan immediately, compared to the bank where there are a lot of uncertainties. Not that banks do not have gold loan portfolios, but because of the sharp focus and ease of use, NBFCs do have captured a significant amount of market share of the gold loan market.
Why are Gold Loan NBFCs Interested in Retail Money Supply?
Now, let me tell you a secret – Everyone loves retail finance!
However, it is very costly to reach out and make the brand. Creating such a brand often requires investing significant money and resources for a long time.
Wint Wealth is helping NBFCs raise retail money. NBFCs believe that they would be able to build trust in retail investors and can leverage it in the long term. Currently, NBFCs raise debt from banks and HNIs. Retail funding will lead to diversification in source funds and therefore stabilise supply of capital for the NBFC.
Obviously, retail investors are also getting benefitted here. So it’s a win-win. To understand this clearly, let’s have a look at the unit economics:
These are approximate costs and may change over time but good enough to give you a sense of things.