Gold loan businesses in India have experienced rapid growth in recent years as gold is a liquid asset that Indians commonly use for quick loans. While gold loan companies can disburse loans much faster than banks, sometimes in under an hour, their higher interest rates and less stringent verification processes have led to instances of fraud. As the gold loan industry continues to expand quickly, there is debate around whether increased regulation could help address issues while allowing for fast loan disbursal that borrowers demand.

1. Goldmine in family silver
Gold loan firms have so far seen rapid but chaotic growth. Would regulations help?
India is one of the largest retail markets for gold and the obsession Indians have for the yellow metal is common
knowledge. Gold loan business, in which gold jewellery is pledged to take loans, has been a practice prevalent in
India for many decades now. In fact, companies like Muthoot Finance started their gold loan business as early as in
the 1930s. Public sector banks too have also been giving loans against gold, mostly for agricultural purposes, for
many years now.
One of the reasons why gold is given to a woman during her wedding is that it is the most liquid asset. And that
precisely helps the gold loan business. A gold loan is probably the quickest way of borrowing money. The target
customers for most of the established gold loan companies are traders and small time businessmen. A difference
from micro-finance institutions (MFIs) here is that these are not loans taken for livelihood but as a quick stopgap
arrangement, bridge capital or short-term credit. Realising the need to have a faster turnaround time in a business
like this, gold loan companies have made speedy loan disbursal their unique selling proposition (USP). For
companies like Muthoot Fincorp, the slogan itself has been ‘gold loan in 3 minutes’.
So even if banks offer gold loans at a lower interest rate, people seek the services of gold loan companies as the time
taken for loan disbursal is an hour, maximum, against a few days taken by banks. The higher interest rate is not a
concern, gold loan companies reiterate, as it is more important for those borrowers to get the loan faster and they are
comfortable paying a slightly higher interest rate for it. High rate of interest is, of course, one similarity between gold
loans and micro-finance.
Fast expansion
The expansion of branch network of gold loan companies, the rally seen in gold prices over the past few years and
banks bracing up gold loan activities in the face of competition from NBFCs have resulted in a rapid growth in gold
loan business in India over the past few years.
The organised gold loan business in India grew at a compounded annual growth rate (CAGR) of 40 per cent between
2002 and 2010.
At the same time, the gold stock in India saw a 22 per cent CAGR between 2002 and 2010, according to a report by
Icra Management Consulting Services.
Gold loan NBFCs, which were almost doubling their loans disbursal every year are now more in need of funds than
ever before, to disburse credit to the gold loan seekers. Although bank loans were a significant source of credit, it was
not possible to depend entirely on them. Options like subordinated debt or commercial papers too could not match up
to the speed at which these companies needed credit.
That is when these companies woke up to options like retail non-convertible debentures (NCDs). Following the
successful retail NCD issue of State Bank of India in 2011 and those of NBFCs such as Shriram Transport Finance,
more NBFCs wanted to tap the retail NCD route to raise funds.
Muthoot Finance has already raised public funds through retail NCD issues twice in four months and is lining up its
third issue in a few weeks. Manappuram Finance too raised funds through a retail NCD issue this year and
Manappuram Fincorp has also been planning one.
Stolen gold

2. Gold loan companies have repeatedly said they don’t offer loans against bullion but against used gold jewellery. But
whether it really happens that way is the question. Last month, a few men pledged fake gold biscuits and took gold
loans of over Rs 2 crore in the New Delhi branch of Muthoot Fincorp. Police investigation revealed that the act was
done in connivance with the employees of the company. Hence the claim of providing loans only against used gold
jewellery came a cropper.
Gold loan NBFCs have time and again reiterated that their know your customer (KYC) norms are strong and they
ensure that the economic profile of the borrower matches the gold that he pledges. They also verify if the borrower
stays in the proximity of the branches. All this is to ensure that the pledged gold jewellery is not stolen. But the New
Delhi incident exposed the many loopholes in the business — like improper verification of the purity of gold, dishonest
employees and a loan size as big as Rs 2 crore. This when the companies have maintained that the average ticket
size of the loan is Rs 30,000-40,000 and a majority of loans are of less than Rs 1 lakh.
The value of gold loan depends upon the borrower, size of the loan amount and the form in which gold is pledged,"
reasons John Muthoot, chairman, Muthoot Pappachan group, of which Muthoot Fincorp is a part.