If you are in need of money and want to borrow from others, everybody prefers to have gold as collateral. The reason is very simple. For the lender, gold is an appreciating asset. For the borrower, the yellow metal offers high liquidity and it provides an instant loan.
India is the world’s second-largest consumer of the precious metal. Most women inherit a certain amount of gold from their families. According to an RBI study, Indian households carry more than 27,000 tonne of gold. As a result, gold loan has emerged as the safest route for women to avail emergency funding. Credit bureau CRIF High Mark’s report says women availed 42% of gold loans in 2022. In most cases, women, especially homemakers, may not have reliable credit score to avail personal loans. Naturally, the precious metal will act as an emergency creditline to them.
When we examine the price movements of gold in the past decades, the metal has shown the trend of constant appreciation. In 2023, the metal gave a risk-free return of 13%, which is higher than any other fixed-income securities like bank FD and PPF. In dollar terms, gold gained 13% in 2023 and in rupee terms gold futures appreciated 15% on MCX.
Gold has, on an average, returned 11.2% in the last 20 years, according to a study by fintech company Smallcase. The precious metal has shown a consistent positive performance over the past 20 years, with only negative returns observed in 2013, 2015, and 2021. It performed exceptionally well in 2011, with the highest return of 30.7%. In 2010, 2019 and 2020, the yellow metal registered a growth of 24.8%, 21.3% and 28%, respectively.
This unfailing faith in the value of the yellow metal is the bedrock of gold-loan business. According to RBI data, the gold loan disbursals have almost doubled from Rs 46,791 crore in September 2020 to Rs 80,617 crore in September 2022. There are several factors that drive this growth. First is the digitization of gold loans. The process of availing gold loan has become fast and smooth with the launch of Aadhaar-enabled (Jandhan-Aadhaar-Mobile) systems.
Second, the emergence of organized players, such as banks and NBFCs, has made gold loans safer and loan repayment systematic. Earlier, the market was dominated by the unorganized local players. They often tarnish the credibility of the business by charging exorbitant interest rates and provide virtually no security to the collateral, which has more emotional value.
Third, a high-pitched financial inclusion campaign by the Central government and the RBI motivated women and other low-income groups to tap institutional credit facilities instead of local moneylenders. It contributes immensely to the business growth of organized players.
In fact, NBFCs have transformed the gold loan market by launching tailor-made products, branding, and branch expansion. They branded gold loans as a secure product by ensuring safety and security to the collateral. Further, they offered accurate gold valuation, maximum loan amount, top-up loan facility, and faster loan processing using technology. Most of them introduced user-friendly mobile apps and hybrid gold loan models to ensure customer satisfaction.
Probably, a slowdown in global economic growth will prompt investors to park their money in safe haven assets like gold. When financial markets turn volatile, gold demand will surge. Also, the domestic demand for the precious metal may rise as it serves as an effective hedge against persistent inflation. So, in all likelihood, the yellow metal is set to register record growth this year too, which is a win-win for all the stakeholders.
(By CA Krishnan R, Director & CEO, Unimoni Financial Services Ltd. Views are personal)