New uptake of gold loan by the NBFC

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Gold is a highly liquid asset, and consumers often leverage gold to meet their financial needs. The gold has been valued and used widely in India historically. From coins to ornaments and to jewelry, gold has found all its uses in our country. Indian households hold a large chunk of gold available in the market. People invest in gold to buy gold jewellery and ornaments so that they can wear them on various occasions and parties. Another reason for investment in gold is that it is of great help when in crisis, you can sell gold rather than getting  loan. Getting a loan is a difficult, stressful and long process as compared to Cash for Gold which gives you 99% of the actual value.

Such popularity and heavy usage of gold contribute to making a huge market for gold loans in India. Before gold loan NBFCs came into the picture, the gold loan market consisted of local dealers, moneylenders and pawnbrokers. They consist of unorganized sectors in the gold loan market. However, in the last decade, the organized sector or gold loan NBFCs and banks have started capturing the attention of consumers and have established a mark for themselves. Although even today, the major market share belongs to the unorganized sector, given the current growth rate of the organized sector in the gold loan market, it is soon expected to change. Also, we can fetch a gold loan interest rate at a low rate of interest which seems to be a viable option. 

The organized sector in the gold loan has grown at a CAGR of more than 30% from 2009 to 2019. The driving force of this tremendous growth has been NBFCs who have extensively grown their network, ensuring faster turnaround time along with providing higher-loan-to-value and advancing loans to non-bankable customers as well. 

However, in the past decade, there have also been cases of NBFCs failing and going bankrupt which has shaken the trust of the market in them. Due to this, banks have become more cautious in lending to the NBFCs sector. Although as surprising as it may sound, the gold loan NBFCs are witnessing ease of financing cost for them. Some key reasons behind this unnatural scenario are that these companies are enjoying the benefits of highly liquid collateral with low leverage and pricing power. It gives them easy access to the bond market and also ensures bank funding. 

These gold loan companies have a competitive advantage that the average tenure of the gold loan is 5-6 months, which ensures good receivables. Thus, even in an economic slowdown, these companies can manage their growth cycle easily by lowering the loan to value and through dynamic quantitative management. 

If you consider the risk cycle of these gold loan NBFCs, their risk weight is at 100 percent when they lend to the general public. However, with their harmonization with asset financing companies, they tend to get the benefit of external rating agencies. For example, Manappuram Finance currently has the rating of ‘AA’ as a company which, as a result, it has brought down its risk weight from 100 per cent to 30 per cent.  

The advancing of credit by FinTech companies to those without any credit history is on the rise, which does possess some threat to the sector. But, another point of consideration is that the credit needs of a large rural population are still not met despite Microfinance entities. Since a large chunk of Indian gold lies in the hands of the rural population, the gap mentioned above promises great things for the sector in future. 

Summary

The popularity of gold in India is second to none. From ages, gold has been used to make ornaments, jewelry, and coins. For centuries Indian people have been investing their money on gold to create wealth. Nowadays, along with investing in physical gold, you can also invest in Gold ETFs. Such a kind of popularity and wide usage of the metal makes the market of gold loan quite big in India. Previously the gold loan market was an unorganized sector consisting of merchants, moneylenders and pawnbrokers. However, in the last decade or so organized sector of gold loan consisting of gold loan NBFCs and banks have gained significant market share.  

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The gold loan organized sector has a growth CAGR of 30% from 2009 to 2019. The vast network of gold loan NBFCs along with quick turnaround time, high loan-to-value and ability to advance loan to non-bankable customers have given them the edge over others.  

Given the recent developments in the NBFC sector, the suspicion of banks regarding advancing loan to NBFCs has grown. However, contrary to the normal course, the gold loan NBFCs are witnessing ease of financing cost. It may due to the benefits owing to dealing in a highly liquid asset, low leverage and pricing power leading them to gain access to the bond market and bank funding. 

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