After the economic devastation caused by two waves of the pandemic, India’s news media have published several stories about how people in distress are pledging their gold jewellery. There was a report published by a leading national daily that particularly caught my attention. It was titled “As lockdown eases, gold loan demand in Tamil Nadu expected to rise,” and it talked about a woman named Rajalakshmi, who worked as a domestic help in two houses in Chennai before the pandemic. worked as. Then she lost her job as people turned away from maids working in the house or outsiders entering the house. Her husband, who worked as a cook in a small restaurant, had the same fate. Her daughter’s school and her son’s college fees were owed, and her savings were not enough, she mortgaged her five sovereigns of gold, which she had saved over the past four years.
Here comes the part that really made me stand out. For her gold loan, Rajalakshmi did not go to one of the renowned gold loan focused Non-Banking Financial Companies (NBFCs) but to a public sector bank. The manager of the bank was also quoted in the story as saying that during pre-covid times 5-7 people used to walk into the bank every month to pledge gold, but now almost every day customers were coming to ask for gold loans. Obviously, the gold loan business in the bank was going very well.
Rise of Banks in Gold Loans: As per the latest monthly data from Reserve Bank of India (RBI), the outstanding gold loans given by banks were on the sectoral deployment of bank credit. ₹62,221 crore as on 30 June 2021 as compared to ₹34,267 crore a year ago, which is a jump of over 80% in just one year. (In June 2019, it was on) ₹25,405 crore.) These figures speak for themselves and it cannot be denied that in the last 3 to 4 years, the banking sector has emerged as a force to reckon with in gold loans. Should this worry NBFCs focused on gold loans? off course not. In fact, as the head of one such NBFC, we welcome the rise of banks in gold lending, believing that their path was indeed paved by gold loan NBFCs. How this happened is a story worth telling.
Gold loans in India have been in existence since ages, carried out by moneylenders and moneylenders working in the streets and by-lanes across the country. It was an obscure world untouched by rules where acrimonious practices were the norm, including usury interest rates. It was the entry of NBFCs with gold loans into the business that changed the dynamics of this business, by bringing in technology and modern management methods and rapidly expanding into rural and semi-urban areas.
Gold Loan is a unique business model of NBFCs, which finances small and marginal borrowers with instant loans. Yes, this cost is higher than the charges levied by the banks. But then, these are people who rarely have a regular source of income or documentary evidence to prove their creditworthiness. Without a valid credit score, they face many hurdles in getting loans from banks. With the high interest rates of local moneylenders as a reference, the gold loan deal offered by NBFCs was a compelling proposition in contrast. As they became regular borrowers in gold loan NBFCs, they developed a credit culture and built a credit history, which enabled them to grow and get access to banks in a reasonable amount of time.
It was also a profound insight given by management guru late CK Prahlad in his acclaimed 2004 book: The Bottom of the Pyramid. luck at the bottom of the pyramid. Writing about how the poor suffer when they lack access to viable sources of credit, he said, “Credit is often unavailable, or is available only from local moneylenders who earn more than 10 per day Interest is charged at 15%. Interest rates of 1,000-2,000 percent per annum are not uncommon. Lucky small-scale entrepreneurs who get a loan from a non-profit microfinance institution still pay 40-70 percent interest per year – which would be considered illegal in most developed countries.”
He then poses a question, “Isn’t the ability of someone with shaky wages at the bottom of the pyramid to get a loan at 20 percent instead of a 300 percent income improvement?” As he explains, poverty alleviation is about improving the disposable income of households by reducing the cost of services, improving its quality, and thus giving them more time to do productive work. When a marginal borrower approaches a gold loan NBFC for a small ticket loan, he walks away with the money in a matter of minutes and can then go about his day to day work. As with any other loan, he will have to submit several documents and take several rounds to complete the approval process, which will cost the opportunity cost of a day or two of lost salary, or more.
Today, if we see that banks are rapidly increasing their gold loan book, it is no small measure for the continued efforts of NBFCs with gold loans. Over the past two decades, they have been instrumental in pulling millions of marginal borrowers into the formal sector. However, the work is not over yet as unorganized moneylenders still dominate two-thirds of the gold loan market. This is why NBFCs with gold loans deserve all the incentives from policy makers to pave the way for institutional lenders to capture market share from unorganized lenders. Ultimately we need many more examples like Rajalakshmi.
VP Nandakumar is the Managing Director and Chief Executive Officer of Manappuram Finance Limited.
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