Gold Loans Surge: Boom or Burden?

Indian households, which own 25,000 tonnes of gold, are mortgaging it for loans in large volumes. Thanks to the thriving gold loan segment, lenders have doubled down on efforts. Fast disbursement, lower interest rates and soaring gold prices make the business lucrative. Most demand is from the middle class, people engaged in agri, small businesses and the unorganised sector.

The current market penetration for gold loans in India is 5.6% of the total household gold. In size, the market is around ₹7.1-lakh crore. It has doubled in 2 years. But despite ballooning growth, most gold market remains untapped. Total gold holdings with Indian households are worth ₹126-lakh crore, as per PwC's August report on 'The rise of India’s gold loan market'. That presents a huge opportunity for banks, NBFCs, fintech and other players. Banks have been especially aggressive in this space. They control 61% of the organised gold loan market as of FY24. NBFCs' share is 39%.

India's gold loan growth story is going strong but that's precisely why the RBI is worried. Its recent findings show banks are bending every rule in the playbook. It flags how complex the problem has become. Add to it malpractices by customers, and it can go out of hand if not handled in time.

The RBI issued a full-scale warning against entities dealing in gold loans last month. Its latest findings only prove what was being reported for long. The RBI says these players were gaming the system. They were valuing gold in the absence of a customer, a violation of the RBI rules. Other findings were credit appraisal and valuation by business correspondents, storage of gold in their custody, KYC via fintech, and even use of internal accounts for loan disbursement and repayment. It found these violations were rampant.

The RBI said banks are flouting LTV (loan-to-value) ceiling rules. Some loans get sanctioned without purpose. Some are closed in a few days. Many are disbursed in cash much beyond limits. The RBI says "inadequate monitoring" by senior management is to blame for this.

The apex bank has given banks and NBFCs 3 months to take these measures. "SEs (supervised entities) must monitor the gold loan portfolio, in light of significant growth in the portfolio in certain SEs. It should ensure adequate controls for outsourced activities and third-party service providers."

India's Vast Gold Assets

Indians buy a lot of gold, only second to China globally. 85% of the jewellery market in India caters to gold. The primary driver is household jewellery. In 2023, Indians bought 747 tonnes of gold, a 3% dip from 2022. The decline was due to a price surge. Between November 2023 to May 2024, gold prices in India surged from Rs 55,375 to 66,532 per 10 grams (22 carat). This year, despite rising gold prices, the demand is up again, as seen in Q1 2024.

Globally, the demand for gold surged by 3% in 2023, with China seeing a 16% growth to 959 tonnes. The U.S., the third biggest, saw gold demand fall 1.1% to 249 tonnes in 2023. Gupta says interest on gold loans differs based on the characteristics of the gold pledged. However, it is usually more cost-effective and involves a less cumbersome process than personal loans. "Easy availability is also one of the factors fostering the rapid growth in this segment," she says. This has fast-tracked due to a thriving fintech revolution in banking in India.

What's Fuelling Gold Loan Rally?

The gold loan market in India has grown immensely over the last few years. Key factors are innovative products like digital gold loans, top-ups, and an increase in digital penetration. Additionally, gold prices are rising -- from ₹61,135 per 10 gm to ₹78,855 in one year alone. This has positioned gold as an attractive option for both lenders and customers.

Banks and NBFCs are doubling down on loans to MSMEs as it's a safe bet. The government offers lower interest rates, relaxed lending norms and tax incentives. "Opportunity to scale up, especially in non-traditional regions of north, central and west India is significant," says Pradeep Mukundan, partner, Deloitte India.

Since customers pledge gold as security, it's easier to auction in the case of default, which helps them keep non-performing assets (NPAs) in check. These entities are now exploring options like "doorstep gold loans", which offer ease and help businesses scale. "Growth in loan volumes without commensurate investment in capacity and processes to assess loan eligibility, especially to assess gold volume in jewellery that's pledged, created additional risk."

Aditi Gupta, economist, Bank of Baroda attributes the uptick in gold loans to a surge in prices. "Due to higher gold prices, consumers can now get a higher quantum of loan with the same quantity," she says. With the RBI’s crackdown on unsecured loans, gold loans' attractiveness for both banks and borrowers has increased, she says. "Since gold loans are secured, it reduces the possibility of default. For borrowers as well, gold loans are an attractive alternative to personal loans."

Signs of Distress in Economy?

Jaikrishnan G, partner, PwC, says the rise in gold loans can't be attributed to economic distress. "Growth in high-quality secured credit also increases liquidity in a growing economy." Entities are expanding by investing in networks, a key for new gold loans. "This is driven by demand for debt from individuals operating micro-business enterprises," says Deloitte's Mukundan.

Gold plays an important role in India's socio-economic culture. Though there's a taboo associated with pledging personal gold ornaments for loans, that's changing. Mukundan says gold loans have come out of the taboo of being considered as the last resort of funding. "Rise in gold loans can not be attributed to economic distress. Growth in high-quality secured credit also increases liquidity in the economy."

The organised gold loan market in India is still too small at 37%, which means local moneylenders control the majority market. Experts say regulated entities have a solid opportunity to go all in. As for the future, they say the demand for gold will not reduce until most of the market stays outside formal finance. "This leaves enough headroom for players to have a share of the pie. Digitalisation will bring more customers into the formal sector," says V.P. Nandakumar, MD and CEO, Manappuram Finance.

Urban and semi-urban areas are expanding rapidly. But, the next phase of growth will happen in rural India, where gold holds an important status. Around 90% of the rural market is yet to be tapped. "Gold loan sector is poised for robust growth – most of it from small towns and villages," says Umesh Mohanan, executive director and CEO, Indel Money.