BackBanks are a force in gold loans thanks to NBFCs
It is the NBFCs that have paved the way for institutional lenders to grow in this segment. But the job is still not done, and policy support is needed to draw more poor borrowers away from exploitative pawnbrokers into formalized lending
PremiumAfter the economic havoc wrought by two waves of the pandemic, India’s news media have carried many stories about how people in distress are pledging their gold jewellery to make ends meet. There was one report published by a leading national daily that particularly caught my eye. It was titled “As lockdown eases, demand for gold loans expected to surge in Tamil Nadu," and it talked about a woman named Rajalakshmi who, prior to the pandemic, had worked as a domestic help in two houses in Chennai. She then lost her job as people became averse to housemaids or outsiders entering their homes. Her husband who worked as a cook in a small restaurant also met the same fate. As her daughter’s school and her son’s college fees were due, and her savings were not enough, she ended up pledging five sovereigns of her gold which she had saved over the last four years.
Here comes the part that literally made me sit up. For her gold loan, Rajalakshmi went not to one of the well-known gold loan focused non-banking financial companies (NBFCs), but to a public sector bank. The manager of the bank who also featured in the story was quoted as saying that during pre-covid times the bank had 5-7 people walking in every month to pledge gold, but now almost everyday customers were coming in to ask for gold loans. Clearly, the gold loan business at the bank was doing very well.
The rise of banks in gold loans: According to the Reserve Bank of India’s (RBIs) latest monthly data on sectoral deployment of bank credit, the outstanding gold loans given by banks stood at ₹62,221 crore as of 30 June 2021 compared to ₹34,267 crore a year ago, that is a jump of over 80% in just one year. (In June 2019, it stood at ₹25,405 crore.) These figures speak for themselves and there’s no denying that over the past 3 to 4 years, the banking sector has emerged as a force to reckon with in gold loans. Should this worry the gold loan focused NBFCs? Not at all. In fact, as the head of one such NBFC myself, we welcome the rise of banks in gold loans, believing strongly that their path was actually paved by the gold loan NBFCs. How it came to pass is a story worth telling.
Gold loans have existed in India for ages, carried on by moneylenders and pawnbrokers operating in lanes and by-lanes across the country. This was a shadowy world untouched by regulations where sharp practices were the norm, including usurious interest rates. It was the entry of gold loan NBFCs into the business that altered the dynamics of this business, by bringing in technology and modern management methods, and by rapid expansion into rural and semi-urban hinterlands.
Gold loan NBFCs have a unique business model, funding small and marginal borrowers with instant loans. Yes, the cost is higher than what banks would have charged. But then, these are people who rarely have a regular source of income or documentary evidence to prove creditworthiness. Without a valid credit score, they face many hurdles in getting loans from banks. With the sky-high interest rates of local moneylenders as the reference, the deal offered by gold loan NBFCs was a compelling proposition by contrast. As they became regular borrowers at gold loan NBFCs, they developed a credit culture and built up a credit history, enabling them to move up the ladder and gain access to banks in due course.
The bottom of the pyramid: This was also the profound insight offered by the management guru, late C.K. Prahlad, in his acclaimed 2004 book The Fortune at the Bottom of the Pyramid. Writing about how the poor suffer when they lack access to viable sources of credit, he observed, “Credit is often unavailable, or available only from local moneylenders who charge 10 to 15 percent interest per day. Interest rates of 1,000-2,000 percent per annum are not uncommon. The lucky small-scale entrepreneurs who get loans from a non-profit microfinance institution still pay 40-70 percent interest per year—rates that in most developed countries would be considered illegal."
He then poses a question, “Is not the ability of someone at the bottom of the pyramid with volatile wages to get access to credit at 20 percent rather than 300 percent improving income?" As he goes on to explain, poverty alleviation is about improving the disposable income of families by reducing the cost of services, improving its quality, and thereby giving them more time to do work that is productive. 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 attend to his day’s work. With any other loan, he would have to submit multiple documents and make many trips to complete the sanction process, thereby incurring the opportunity cost of lost wages for a day or two, or more.
Today, if we see banks rapidly scaling up their gold loan books, it is due in no small measure to the sustained efforts of the gold loan NBFCs. Over the last two decades, they have been instrumental in pulling up millions of marginal borrowers into the formal sector. However, the job is far from over as unorganised moneylenders still hold sway over two-thirds of the gold loan market. That’s why gold loan NBFCs deserve all the encouragement from policymakers to continue leading the way for institutional lenders to gain market share from unorganised lenders. Ultimately, we need many more examples like Rajalakshmi.
V.P. Nandakumar is managing director and chief executive officer of Manappuram Finance Ltd.
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