Gold loan companies in India are intensifying growth plans. But with defaults and irregularities, the RBI has issued new guidelines to contain malpractices
Did you know that you can walk up to the counter of a gold loan company with a piece of jewellery, have it quickly assessed, and receive a loan — actual cash in your hands — in a matter of minutes? It sounds too good to be true, but it’s a fact. And it’s happening all across India, giving people who are traditionally left out of the banking sector an opportunity to access liquidity when they need it most.
The reason people go to GLCs is the next-to-nil time they take in disbursing loans. The very nature of the business, cash against the collateral of gold, makes it an attractive one, given the risk factors seem fairly low compared to the opportunities and growth prospects.
Gold loans are popular because of three main factors:
- Speed: Loans are processed almost instantly.
- Ease of Access: More accessible than traditional banks for many.
- Low Risk: Since loans are secured with gold, they carry lower risks for lenders.
Here’s a look at how gold loans work, their massive growth, and new guardrails put in place by the RBI to contain irregularities and fraud.
The what, how and why of GLCs
Gold loans are a secured financial product offered by both banks and non-banking financial companies (NBFCs) within the regulated financial system, as well as by local money lenders in the unregulated space. These loans involve pledging gold jewellery as collateral, with the loan amount determined by the current market value of the gold.
Customer profile and financing options
The typical customer of a GLC often resides in semi-urban or rural areas, works outside the organised sector, and may have limited formal education. This demographic faces significant challenges in accessing traditional bank financing, leaving them with three primary options:
- Microfinance institutions (MFIs): Suitable for small loan needs, often requiring group participation. However, most MFIs operate as non-profits, which may limit their loan offerings.
- Local moneylenders: Known for high interest rates and exploitative terms, these lenders often operate informally, leveraging class and caste dynamics. Despite regulatory efforts, moneylenders remain a prevalent source of credit. A report on informal credit in India’s agricultural sector states that agricultural and professional moneylenders together account for 20.5% of the total outstanding debts, and this amounts to more than one-half of the total informal debt of the agricultural households. A Situation Assessment Survey (SAS) of Agricultural Households in the rural areas of the country, during the NSS 70th round in 2013, estimated that at an all-India level, about 40 percent of loan by agricultural households was taken from non-institutional sources, which included employer/landlord, agricultural/professional money lender, shop-keeper/trader, friends, relatives and others.
- Gold Loan Companies (GLCs): Offering a more formalised alternative, GLCs provide quick access to funds. Although interest rates are high, they offer a viable option for those with gold jewellery, helping alleviate liquidity issues in times of need.
The GLC growth story
GLCs are no longer confined to rural and semi-urban areas. Over time, banks have increased their focus on unsecured loans, including personal loans and BNPL (buy now pay later) options, which has drawn regulatory attention due to rising risks. The RBI’s increase in risk weightage for unsecured loans from 100% to 125% has prompted banks to shift capital towards more secure options like gold loans.
Banks and NBFCs are now intensifying efforts in the gold loan sector, driven by its attractive growth potential. While traditional banks leveraged their existing infrastructure, NBFCs spurred competition with flexible rates and quick disbursals. This competition has led both to expand their portfolios and adopt varied strategies to grow their customer base and market share.
Collaborations with fintech companies have further enhanced customer acquisition, digitisation, and cross-selling opportunities, making gold loans a key product for financial inclusion. These partnerships have also helped address challenges such as fraud prevention, gold purity assessment, and customer targeting, ensuring the sector’s continued growth and stability.
In an analysis of India’s gold loan market by PwC, VP Nandakumar, MD and CEO, Manappuram Finance Ltd, stated:
“The demand for gold loans is not going to reduce anytime soon as a greater part of the gold loan market still lies outside the ambit of formal finance. This leaves enough headroom for all the players involved including banks, NBFCs and FinTechs to have a share of the pie. I expect that in the days to come, digitalisation will hasten the process of bringing more and more customers into the formal sector.”
The gold loan market is set for further growth, driven by the sustained increase in per-gram gold rates and customer demand. The unorganised sector accounts for 63% of the gold loan market, while organised players like banks and NBFCs have a 37% share.
A bright, shiny future?
In the first seven months of the 2024-25 financial year, gold loans by banks surged by 50%, outpacing the single-digit growth in other personal loan segments. As of October 18, 2024, gold loan outstanding stood at ₹1,54,282 crore, marking a 56% year-on-year growth compared to 13% in October 2023. This increase is attributed to factors like a shift from NBFCs and a growing preference for secured loans over unsecured ones. Additionally, rising gold prices have allowed borrowers to repay old loans and secure larger new ones.
India’s organised gold loan market is set to grow significantly. Rating agency ICRA projects it will exceed ₹10 trillion in the current financial year and reach ₹15 trillion by March 2027.
Some of the key factors driving growth are:
- Bank dominance: Public sector banks lead the gold loan market, mainly through agriculture loans secured by gold jewellery.
- NBFC expansion: NBFCs are expected to grow their gold loan portfolios by 17-19% in FY2025.
- Market share: Public sector banks have increased their share, while NBFCs maintain a stable presence in the retail segment.
- Rising gold prices: Higher gold prices boost the demand for gold loans as people seek to convert their gold assets into cash.
- Financial inclusion: Broader access to credit and financial services supports the growth of gold loans.
- Consumer demand: Increased demand for gold jewellery. and related products underpins the need for gold loans.
The organised gold loan sector grew at a compound annual growth rate (CAGR) of 25% between FY2020 and FY2024, with banks expanding their gold loans at a higher CAGR of 26%, compared to 18% for NBFCs. ICRA anticipates continued growth in this sector, with banks maintaining dominance and NBFCs playing a crucial role in the retail market.
The way forward and RBI’s guidelines
While gold loans have shown strong growth, the Reserve Bank of India (RBI) has flagged concerns about irregular practices among some entities. A recent RBI report highlighted that gold loans grew significantly in the period ending September 2024 compared to the previous year, underscoring the increased reliance on gold as collateral for financial needs. The RBI noted, “Gold loans have clocked rapid growth in the period ending September 2024 as compared to a year ago.”
However, this growth has brought issues to light. The RBI issued guidelines on September 30, 2024, urging supervised entities (SEs) to review their policies and practices related to gold loans. Key concerns include:
- Deficiencies in outsourcing practices
- Discrepancies in gold valuation
- Inadequate due diligence
- Poor monitoring of how loan funds are used
- The issue of “evergreening,” where lenders provide additional funds or extend loan maturity to struggling borrowers
These guidelines aim to ensure that the rapid expansion of gold loans remains sustainable and free from malpractice. The RBI’s focus on transparency and compliance highlights its dedication to protecting borrowers and maintaining financial stability.
As NBFCs continue to dominate the gold loan market, these regulatory measures are expected to enhance trust and efficiency in this vital lending sector.