Gold Loan Business Model in India - Economics of Gold Loan in India

Gold loans, till mostly an unorganized industry sector, may be uniquely positioned to capitalize on demands for loans in the post-Covid period. This is especially true for both individuals as well as for small business clients. A strong digital footprint and an expanded branch network may be just what’s needed to capture this sizable market segment.

Right now, the pandemic is creating a problem in the availability of loan funds. This is happening because the banks themselves are in a bad shape. Thus, they are keen to give money under a stringent and strict policy, to only those customers who are most likely to pay back loans. Banks may have considerable liquidity, but they are not willing to lend out, except to credit card owners. Because of all this, it is harder to get personal loans right now. Lenders are now looking beyond credit scores. For individuals and small businesses strapped for cash, this has created a unique problem. However, in such a situation, the savior can be a gold loan.

The Economics of Gold Loan in India

According to a KPMG report in January, the Indian organized gold loan market is estimated to be valued at around Rs. 467,200 crore. Approximately, this is 35% of the gold loan market with commercial banks. Small finance banks, Fintech companies and NBFCs are now the key players in the market. The unorganized gold loan sector is thrice as large.

Right now, there are a couple of big opportunities for the gold loan players in the organized market. Firstly, they have a big opportunity to bring unorganized money lenders under the organized market. This will ensure a tighter RBI regulation and a low rate of interest. Secondly, from out of the 22,000 tons of gold which Indian households have right now, only 5% are pledged as deposits of gold loans.

Now is the time to make the best effort

From all the rest, Muthoot Finance has been the preferred gold loan company for a long time. Compared to many NBFCs, its gold-lending business is de-risked.
How can gold loans rise to the challenge post COVID?

Muthoot Finance company’s chairman, George Alexander Muthoot, admits that after the pandemic, the market scenario can give a big opportunity for gold loan companies in the country. Here is how it can happen.

1. Small businesses will be in need of working capital. Since banks are reluctant to provide new risk for themselves, the role is taken by gold loan companies.
2. Because of the lockdown, payments are delayed to traders, small businesses and shopkeepers. They require finance in the meantime till regular cash starts flowing again. Gold loan can be the better credit choice here.
3. Both Mannappuran and Muthoot Finance are expecting a huge surge in demand for gold loans from retail customers as well. Many families are facing job loss and income reduction. For them, gold loan is the credit choice that is least risky.
4. Gold loans also have the Loan to Value advantage. Companies offering this service are giving 75% LTV.
   

For both small businesses and individuals, gold loans may be positioned uniquely to capitalize on the post-COVID demand for credit. A strong digital footprint and an expanded branch network may be able to capture this nascent market.