By Chandan Khaitan
From time immemorial, gold has been key storage of value. The shiny yellow metal is renowned for its scarcity, malleability, indestructibility and symbol of wealth across thousands of years. Culturally, gold continues to be the go-to metal when celebrating special occasions, milestones or even religious festivals. Not just people but central banks worldwide, too, ensure a sizable gold reserve to support their respective currencies in circulation.
India is among the largest consumers of gold in the world. The festive season comprising Diwali, Dhanteras and Akshay Tritiya and wedding seasons spike the demand for gold, especially in jewellery. These occasions combined account for more than 70% of the gold sales in the country. As per the nationwide household gold consumption survey by the India Gold Policy Centre (IGPC) at the Indian Institute of Management, Ahmedabad (IIM-A), gold consumption in Indian households is the highest among the middle-income group – those with annual income between Rs 2 lakh and Rs 10 lakh. These middle-income group households consumed an average of 56 per cent of the total volume of the yellow metal sold in the country in the last five years. Gold continues to be a ‘must hold’ among Indians, with over 75 per cent of the households agreeing to own the yellow metal in some form or another.
It is, therefore, no wonder that gold becomes a go-to as a pledging instrument for households to tide over important or crisis-driven financial obligations. Gold loans in India have been prevailing for centuries and, owing to the unorganised nature of the lenders, are considered a debt trap. As per World Gold Council, Indian consumers are likely sitting upon $1.5 trillion in gold reserves – thereby indicating a massive opportunity for the NBFCs and banks to capitalise upon. The gold loan market is dominated by unorganised lenders, who account for ~2/3rd of the total opportunity. In 2019, as per KPMG, the gold loan outstanding in the organised sector was just 5.5% of the total household gold holding in the country, indicating a huge opportunity.
The question is how well this opportunity can be capitalised on by both the consumers and the organised players. Consumers generally opt for unorganised players due to proximity, no paperwork, trust, instant disbursal, some flexibility and a higher loan-to-value (LTV) ratio. On the flip side, the interest rates are incredibly high, there is no control over the safety of the pledged gold, and there is hardly any clarity on if the same gold jewellery will be returned without modifications or tampering.
But, being a desperate attempt to arrange finances, the focus is generally on the immediate cash and not on the repayment when dealing with unorganised players. This lack of clarity has made gold loans a one-way asset-losing road for millions of Indians in the past. This has led to the shift to the organised sector to a large extent. However, with the organised players comes paperwork, regulations, low LTV and timely obligation to pay. At the same time, the concerns around safety, quality, repossession and obnoxious interest rates are laid to rest owing to high transparency and systems.
The choice lies with the customer, indeed. But given that gold loans are primarily considered to be “the last resort” in Indian households, due awareness among end consumers will be the key to mainstreaming the gold loan opportunity. The landscape around the gold loan is much like credit card consumption in the early 2000s, with consumers dissuading the use of credit cards to escape the debt trap. With the savings and spending culture changing, credit cards have become a diverse product suite comprising customised products and an essential tool for creating a credit footprint among customers.
Gold loans also will have to undergo a concerted effort to mainstream this as a financial product in the future. Towards this, technology will have to play a vital role in accentuating user experience and imparting complete process transparency, including an efficient prepayment process. The influx of new-age fintechs is helping to solve this problem of expanding the opportunity landscape.
The big picture, however, is yet to emerge, but one thing is sure – gold loans as a financial product will see unprecedented demand in the coming years in the country. The bigger question is, who would make it look cool and normal? And that’s the question worth its weight in gold.
(Chandan Khaitan, CEO, ONE Muthoot. The views are the author’s own.)