Surveying the Indian Gold Loan Market


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With India's vast gold stock, the gold loan market has huge growth potential, and is currently dominated in the organized sector by banks vying with non-banking finance companies. New gold financial products and improved technolgoy are keys to capturing market share in this fast-growing area.

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Surveying the Indian Gold Loan Market

  1. 1. • Cognizant 20-20 InsightsSurveying the Indian Gold Loan Market Executive Summary interest rates and charges, and non-adherence to know your customer (KYC) regulations. This may Gold has long been a valued commodity, particu- further impact the dominance of NBFCs in the larly in India where it is considered auspicious, gold loan market. and has been in use for centuries in the form of jewelry, coins and other assets. Though gold is At just 1.2% of the total gold stock in the country, a highly liquid asset, it wasn’t until recently that gold loans have a huge growth potential. However, consumers leveraged it effectively to meet their firms need to develop distribution, product and liquidity needs. risk mitigation strategies to get a share of the pie in a profitable and sustainable fashion. Lenders provide loans by securing gold assets as collateral. Compared with the rest of the world, in Background: Gold and the India the gold loan market is big business. Until a Indian Society decade back, most of the lending was in the unor- ganized sector through pawnbrokers and money As previously noted, gold has traditionally lenders. However, this scenario changed with been among the most liquid assets and is an the entrance of organized sector players such accepted universal currency. It has traditionally as banks and non-banking finance companies been consumed by individuals in the form of (NBFCs) which now command more than 25% of jewelry, especially in India where it is considered the market. auspicious. Gold is presumed to be a safe haven in times of economic uncertainty, a fact exemplified The organized gold loan market has grown at by a 30% increase in the value of gold over the 40% CAGR from 2002 to 2010. NBFCs have been past year. a major driving force behind this growth given their extensive network, faster turnaround time, India is one of the largest markets for gold, higher loan-to-value ratios and the ability to accounting for approximately 10% of the total serve non-bankable customers. Of late, banks world gold stock as of 2010. Rural India accounts have improved their gold loan product features for 65% of this gold stock. Though gold prices and services. Coupled with comparatively lower have increased at more than 19% CAGR from interest rates and charges, banks stand to gain 2002 to 2010, gold stock in India has grown at market share at the expense of NBFCs in the near 22% CAGR during the same period to 18,000 future. tons (Rs. 32,000 billion) as depicted in Figure 1. The demand for gold has followed a regional With rapid growth, regulatory scrutiny has trend with southern India accounting for 40% increased on gold loan lending practices. NBFCs of annual demand, followed by the west (25%), are under greater focus as a result of their higher north (20-25%) and east (10-15%). cognizant 20-20 insights | january 2012
  2. 2. Value of Gold Stock (Rs. Bn) Gold Loan Market Size (Rs. Bn) 35,000 600 28% 32,000 30,000 41% 500-530 500 25,000 25,000 46% 400 50% 375 20,000 300 44% 250 15,000 CAGR 13% 11,669 200 CAGR 10,000 37% 6,462 120 100 5,000 25 0 0 FY02 FY07 FY09 FY10 FY02 FY07 FY09 FY10 FY11Source: Muthoot Finance, August 2011 Source: Muthoot Finance, August 2011Figure 1 Figure 2Indian households typically have an emotional Share of Organized Marketattachment and sense of personal belonging to Players (%)the gold they own, which is usually in the form ofjewelry, coins or bars. Thus, gold owned by Indianfamilies is rarely liquidated unless in extreme 14.50% 12.10% 9.70%financial need — consequently, monetary value ofa gold investment is rarely realized. But, pledging 18.40% 23.60% 32.20%gold ornaments and other gold assets to local 14.80% 13.70%pawnbrokers and money lenders to avail loans 11.60%has been prevalent in the Indian society for manydecades, particularly in rural areas. However, over 52.30% 50.60% 46.50%the past decade, the organized sector – banks andNBFCs – have taken the lead. The urban populaceis also beginning to realize the potential valuethat can be realized through gold loans, which FY07 FY09 FY10has led to rapid growth of the gold loan market Public sector banks Private sector banksin India. NBFCs CooperativesLooking for Gold in the IndianGold Loan Market Source: Muthoot Finance, August 2011 Figure 3Major PlayersThe key players in the Indian gold loan marketinclude the unorganized sector, banks – public/private/cooperatives and NBFCs. While the unor- 40% CAGR from 2002 to 2010 (see Figure 2) andganized sector, comprising local pawnbrokers is expected to grow by 33% to 41% CAGR in 2011.and moneylenders, has traditionally dominated And in doing so, these companies are challengingthe gold loan market for many decades and the dominance of the large unorganized sector.still commands nearly 75% of the market, the Within the organized sector, NBFCs have grown atorganized sector, led by NBFCs, is catching up fast. a rapid rate from 18.4% in FY07 to 32.2% in FY10The organized sector has grown at a rapid pace of as depicted in Figure 3. cognizant 20-20 insights 2
  3. 3. Gold Loan Portfolio of Key Market Players (Rs. Bn) CAGR 73% 74% 64% 32% 46% 13% 58% 19% 52% 80 73 70 60 52 50 40 39 33 33 31 30 26 24 22 20 17 17 19 14 15 16 14 12 12 11 9 11 9 10 5 5 6 6 4 0 Muthoot Mannapuram Muthoot India Bank India Federal South India State Bank Andhra France Fincorp Overseas Bank Bank of Travancore Bank Bank FY07 FY09 FY10Source: Muthoot Finance, August 2011Figure 4Figure 4 depicts the gold loan portfolio size for few limits on cash usage, high LTVs and flexibil-key organized sector players, again highlighting ity, it is easy to see why gold loans are becomingthe rapidly growing dominance of NBFCs (e.g., more and more popular.Muthoot Finance, Manappuram and MuthootFincorp). Why NBFCs Are Growing By virtue of their business model, NBFCs haveKey Features of Gold Loans grown rapidly over the last few years as evidencedThe key features of gold loans in the Indian context by their increase in market share. A comparisonare described in Figure 5. With easy disbursals, of gold loan features across key players is high-Gold Loan Features Secured Loan is borrowed against the gold deposited by the applicant. The loan can be used for any purpose, as long as it is not for any illegal activity or spec- Multi-purpose ulation in the stock market. NBFCs place even fewer restrictions on the use of loan. NBFCs and the unorganized sector disburse loans at a much faster pace (as low as Low disbursal times three minutes to a few hours) as compared with banks which may take a few days. High loan-to-value While banks would typically not give more than 75% of the gold value as loan, NBFCs’ (LTV) ratios lending could go as high as 95% in case of high-purity gold. There is no minimum period for the loan and, if need be, one can return the loan Shorter loan tenures amount the very next day. The average tenure of the loan is about 90 to 100 days. The interest rate depends on the tenure and amount of loan. It varies from 12% to 18% in the case of banks, while for NBFCs, it could reach 24%. The interest rates charged Varied interest rates by the unorganized segment are much higher and can range from 30% to 50%. Reasonable rates of interest are especially applied if the loan to value (LTV) does not exceed 50-60%. Repayment can be structured as just interest amount with principal being repaid at the Multiple repayment end of the period in one lump sum. Repayment through EMI, covering interest as well options as principal, can also be an option.Figure 5 cognizant 20-20 insights 3
  4. 4. lighted in Figure 6. The key differentiators for the • Non-bankable customers are also served.NBFCs as compared to the banks and coopera-tives are: • Better operating cost structure vis-à-vis banks. • Convenient hours of operation.• Quick loan approvals and disbursals, with minimal documentation. • Flexibility: Provision of very small and very large loan amounts.• Multitude of loan options with higher LTVs.• Greater accessibility due to better penetration.Feature Comparison of Gold Lender Offerings Lender Banks/NBFCs Loan Indian Feature Muthoot Federal South Indian State Bank of Andhra Manappuram Muthoot Fincorp Indian Bank Overseas Finance Bank Bank Travancore Bank Bank Rate of 12% to 21% 13.45% to 24% 12.25% to 12% to 12.5% 13.5% to 13.75% 15.00% interest (%) 15.25% 15.75% Loan-to- Avg of 72%, Up to 85% Up to 90%; 100% Lower of Up to 85% Avg of 73% Based on rate Based on value ratio high of 85% in some cases 70% or to 76% per gram and rate per value based purity gram and (%) on rate per purity gram and net weight Loan tenure 6 to 36 months 6 months 12 months 6 to 12 24 months to (max) months (max) 12 months Disbursal 5 mins 5 mins 3 mins to 4 hours time Min loan 1,500 500 50,000 10,000amount (Rs.) Max loan 10 million 10 million No limit 2 million 1 million 7.5 million 1 millionamount (Rs.) Purpose Any Any Any Any Commercial Any Any Any Any only Processing 0 0 Rs. 5 to Rs. 75, 0.5% Rs. 202 per 0 0.25% Nominal fee based on loan for loans lakh; Rs. 300 appraiser amount greater than appraiser charges Rs. 25,000 commission Pre- 0 0 0 payment penalty (Rs.) Documenta- Only ID at Only ID at Only ID at ID proof Proof of Asset ID proof ID proof ID and tion disbursal disbursal disbursal and asset commercial ownership and asset and asset residence ownership activity; proof ownership ownership proof documents unaudited and bank documents documents balance account sheet for > 3 lakhs; jewel appraisal certificate Others • In-house • Interest to • Part redemption • Minimum important evaluation be paid for • Part payment interest is • Schemes number of • Exclusive the lower features days loan of 5 day with counters for different availed loans more than interest or value per Rs. 25,000 Rs. 50 gram and cor- • Prompt • Schemes responding payment rebate with interest rate of 2% different • Minimum 7 value per days interest is gram payableFigure 6 cognizant 20-20 insights 4
  5. 5. Loan Interest Rate Comparison Across Categories Lender Banks/NBFCs Loan Category Indian State Muthoot Muthoot Federal South Indian Mannapuram Indian Bank Overseas Bank of Finance Fincorp Bank Bank Bank Travancore NA NA NA 11% to 11% to 11.03% to 13.65% to 11.5% to Home Loan 11.75% 11.75% 11.53% 14.90% 12.25% NA 11.75% to 13.25% to 12.25% to 13.65% to 12.5% to Car Loan 12% 13.75% 13.25% 15.15% 13.25% 12% to 13.45% to 12.25% to 12% to 13.5% to 13.75% 15.00% Gold Loan 21% 24% 15.25% 12.5% 15.75% Personal NA NA NA 17.25% 15.75% 17.75% to 17.90% 19.25% to Loan 20.25% 19.75%Figure 7A comparison of interest rates charged by lenders The increase in gold prices over the last fewacross loan categories is shown in Figure 7. The years, coupled with the surge in gold loancomparison of interest rates shows that gold borrowings during this period, could create aloans fetch banks higher rates as compared to gold bubble which could burst in the event of ahome loans and car loans. Hence, this category significant correction in gold prices. Banks/NBFCsis being targeted aggressively by banks. However, with significant exposure to gold loans couldNBFCs have a much greater focus on gold loans face widespread defaults, which could adverselyand continue to provide attractive loan features impact the economy.which enable them to charge higher rates,generate higher profits and grow rapidly in a The organized sector today manages these riskssingular direction. through various methods such as enhanced security, insurance cover, buying gold futures, etc.Risks to Borrowers and Lenders Regulatory EnvironmentSince lenders take possession of the gold assetsin a loan transaction, in case of a theft they may While there are no means of controlling the unor-not have sufficient funds to compensate all the ganized sector, the organized sector of banks andborrowers for their loss in its entirety. This is more NBFCs come under the purview of the Reserveimportant for loans placed in the unorganized Bank of India (RBI) which has norms to regulatesector; banks/NBFCs usually have better security the gold loan market.and insurance coverage. Furthermore, financial NBFCs had been traditionally disbursing goldpackages cannot compensate for the personal loans through funds received from banks underattachment a borrower has with the gold assets. priority lending for the agricultural sector. TheMoreover, a sharp decline in gold prices increases loans under this category enjoy an interestthe original LTV. A lender may require an rate discount of approximately 200 bps overimmediate recovery of any amount that exceeds the normal interest rates charged by banks. Butthe original LTV ratio, but the borrower may be to reduce the risk in the system, the RBI ruledunable to pay this amount. Restructuring of the in February 2011 that bank credit to NBFCs forloan may be required in these cases. Addition- lending against gold jewelry will not be treated asally, if the value of the pledged asset declines, a exposure to the agricultural sector. The resultingborrower may be more willing to default on the higher interest rate for funds is expected toloan. This poses a serious concentration risk to promote better lending practices by NBFCs tothe lender, especially to the NBFCs that have a creditworthy borrowers.high exposure to gold loans and lend at high LTV With the continued rapid growth of the goldratios. loan market in India, RBI has started examining cognizant 20-20 insights 5
  6. 6. lenders, especially NBFCs, for possible con- Gold loan firms use negligible or small-scale centration risks (i.e., risks due to a sharp proprietary IT systems. These are proving to be decline in the prices of gold for a lender with a inadequate given gold lenders’ strong growth. large exposure to gold assets pledged against the Hence, firms are increasingly looking to leverage loans). technology for further growth. They are engaging enterprise solution providers to provide integrated All lenders are required to adhere to the KYC solutions for loan origination, servicing and col- norms. NBFCs allegedly have not strictly followed lections. this regulation and hence With approximately have been under the RBI’s Conclusions scanner for some time now. 65% of the market in For borrowers, gold loans have emerged as one of the best means of raising quick, short-termrural areas, firms need Currently, NBFCs’ gold capital. For lenders, gold loans are more advanta- loans are regulated by RBI. to develop strategies However, some state govern- geous compared with home and car loans becauseto target this segment ments require compliance of the shorter tenures, lower processing time and cost, and greater returns due to higher interesteffectively and provide with relevant state money rates. These factors, along with appreciation in lending statutes. If the state better accessibility governments succeed in value of gold, have led to an explosion in the gold to borrowers. When enforcing this regulation, loan market. With everyone wanting a piece of this action, the organized sector is challenging the expanding, firms need the profit margin of NBFCs large unorganized gold loan market dominated would be further squeezed. to ensure consonance by pawnbrokers and moneylenders, with NBFCs of services and There have been recent leading the pack due to simpler approval and complaints regarding high disbursal processes, flexible products and betteroperations throughout interest rates and penalty accessibility. the network. rates charged by NBFCs. This An examination of these trends makes clear that has caught the attention of banks/NBFCs that aren’t yet into the gold loan regulators; any regulatory move in this regard market might find it attractive. This is due to the would impact the profit margin of NBFCs. following factors: Role of Technology • Better ROI due to lower cost, higher interest Information technology has played an increasing- rates and strong collateral. ly important role in the rapid growth of the gold loan market. • Ability to compensate for lower off-take of car/ home loans. • Technology provides scalability to gold loan • Scope for cross-sell opportunities in future businesses, enabling quick roll-out of branches including other gold-based products. and efficient penetration of the underserved markets. • Opportunity to capture the growing under- served and under-penetrated market. • Provision of accurate real-time information has led to faster decision making and reduced With approximately 65% of the market in rural turnaround time for loan disbursals. areas, firms need to develop strategies to target this segment effectively and provide better acces- • Technology has significantly reduced human sibility to borrowers. When expanding, firms need intervention and thereby, the approval, to ensure consonance of services and operations disbursal and repayment processes have throughout the network. become much faster, simpler and more robust. Better adherence to lending regulations (KYC, Firms need to manage risks related to possible priority lending, etc.), consonance in firm-wide sharp fall in gold prices and non-adherence of lending activities, efficient tracking of borrower regulatory norms and also need to ensure that accounts, process transparency and minimi- physical assets are properly valued, stored and zation of operational costs are some of the documented. Firms need to invest in technology major benefits realized through the use of to better manage the increasing volumes and to technology. reduce risks. cognizant 20-20 insights 6
  7. 7. Recent Developments and from banks, NBFCs are seeking newer avenuesFuture Outlook of borrowing. In addition to using bonds and commercial papers, NBFCs are attracting hugeTo compete with NBFCs, banks have recently private equity investments of late.improved/streamlined their loan processes –with some banks purchasing assaying machines Gold loans have become a basis for creationto disburse loans in 15 minutes. This poses a of new financial products such as loans forchallenge to the growing dominance of NBFCs in purchase of gold wherein gold is purchased onthe gold loan market, more so since banks usually the date of the loan and held as a pledge untilcharge lower rates of interest compared with the equated monthly installments are paid. GoldNBFCs. saving schemes are also emerging wherein the customers pay regular cash flows which onGold loans are among the newest class of assets maturity are added with a certain amount ofwhich have seen rapid growth in securitization. interest payment to purchase gold for customers.But, with the restriction on agricultural sectorstatus of gold loans by RBI, the pace of securiti- With frequent hikes in interest rates by the RBIzation of these loans is slowing down as most of and the subsequent hike in rates by banks, thethese securitizations focused on benefits accrued cost of personal loan borrowing is increasing. Thisthrough the use of agricultural sector status. will lead to an increased consumer willingness toAlso, RBI’s draft securitization guidelines (Sept. secure gold loans.2011) had proposed minimum holding period(MHP) of 12 months for allowing securitization Since more than 75% of the gold loan market istransactions. Given the short tenure of gold loans still with the unorganized segment as of 2010,(a year and lesser), securitization of the same will the organized segment has a huge potential fornot be possible. A new proposal is under consid- growth through cannibalization of the unorga-eration to modify the MHP for gold loans to two nized segment. A bigger, better and more efficientmonths, which would allow securitization of gold network of branches would help the organizedloans. This would further provide liquidity to the segment target this growth area.primary market and provide a boost to the overallgold loan market. The gold loan market in India is still under-pen- etrated considering the abundant availability ofThe government views gold loans as an effective gold as collateral with Indian private householdsmeans of meeting the demand for micro-finance and the existing size of the gold loan marketin India. This would encourage framing of policies (approximately 1.2% of the total gold stock). Thisfavorable to the growth of the gold loan market. presents a significant scope for growth of the gold loan market.To counter the rise in borrowing costs due toremoval of agricultural sector status on loansReferencesMuthoot Finance, NCD Prospectus, Aug 2011India Securitization Summit 2009, White PaperRBI, Draft Revisions to the Guidelines on Securitization Transactions, Sept. 2011 cognizant 20-20 insights 7
  8. 8. the AuthorsAmit Churiwal is a Consultant with Cognizant Business Consulting, where he has worked with the Cardand Payments Practice and is now a part of the Consumer Lending Practice. He can be reached at Shreni is the Consumer Lending Practice Head with Cognizant Business Consulting and has workedfor over 12 years in the BFSI space on projects spanning business and IT strategy, business processoptimization and complex project execution. He can be reached at CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member ofthe NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performingand fastest growing companies in the world. Visit us online at or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7121 0102 Fax: +91 (0) 44 4209 6060 Email: Email: Email:© Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.