Gold loan digitalisation accelerates credit penetration with accessibility and disbursal agility

Authored by Umesh Mohanan, Executive Director and CEO of Indel Money

In a traditional Indian household, gold is treated with more of aesthetic value than a safe haven asset. But now, the scenario is slowly changing. Even in rural households, the precious metal has gained the status of a hybrid asset class that can be leveraged in a financial emergency. This shift in outlook has happened over a period of time. Consequently, the gold loan industry is also booming in tandem with the rising demand for gold monetization.

In an emerging economy like India, rising interest rates and surging credit costs along with credit parameters hinder stable credit growth. When the interest rates go up and the central banks mop up liquidity, the retail loans will become pricey. As a result, people will look for alternative sources of funds even if interest rates are a bit higher. Thus, an unusually tight credit situation will force loan seekers to explore options like gold loans or mortgage loans.

India is considered the largest market for gold loans. Indian households possess more than 27,000 tonnes of precious metal, which is 14 per cent of the world’s total gold holdings. An RBI report estimates that almost 5,300-tonne gold is pledged and the unorganised sector holds more than 60 per cent of this pledged quantity. Remarkably, it offers a huge business opportunity for organized players as people prefer to do business with credible lenders.

A consistent surge in gold prices is also making gold loans a very attractive option for both lenders as well as consumers. The organized gold loan market is worth Rs 6 lakh crore and, currently, the share of NBFCs in this segment is smaller compared to that of the banks. Further, private banks are expanding fast on this turf as it has low default risk compared to other unsecured retail loans.

According to the latest RBI survey, credit demand is likely to be steady in the current fiscal year (FY24) and the organized gold loan segment stands to benefit from this optimistic outlook. On average, private banks have registered 20-22 per cent growth in the retail loan portfolio in the June quarter. The gold loan companies are facing stiff competition from banks that have the advantage of low-cost funds. But the gold loan NBFCs have adopted agile ways to beat the competition, particularly in the rural and semi-urban markets, as they are nimble-footed in executing deals compared to large legacy players.

Since loan applicants are in urgent need of money, the speedy and hassle-free disbursal of loans is the crucial factor. Thus, the identification of target groups and the quick delivery of financial services through digital channels help NBFCs score over traditional lenders. Another reason for non-banks to excel in the gold loan business is their focus on the core business. For banks, a gold loan is an additional service on offer. In the case of NBFCs, gold-backed lending is the core area. Naturally, building competence in the core business area will help them draw more customers into their fold and strengthen their business activities.

A major advantage of the gold loan companies is the easier and more secure documentation process. Digitization has almost fully replaced paper with an e-filing system. NBFCs have digitized themselves to such an extent in which customers have to visit the offline office only twice -- first to deposit and then to retrieve gold. All other transactions can be done digitally. Some digital companies have even launched mobile services wherein the company executives will visit the loan applicant’s home to collect gold and release funds. After the loan closure, the collateral will be delivered to the customer’s doorstep.

Above all, digital authentication using Aadhaar has made the KYC process smooth. According to a recent study, India is likely to have 90 crore active internet users by 2025. The use of smart devices increased from 8 per cent in 2021 to 13 per cent in 2022. Internet usage for digital payments has also recorded a 13 per cent growth in 2022 compared to the previous year.

The gold loan digitisation assumes greater significance in this context. Digitization will stimulate credit penetration into largely untapped segments of society as the tech-enabled systems enhance the accessibility and delivery of financial products and services. India has a vast pool of ‘new-to-banking’ customers as the accounts opened under the world’s largest financial inclusion programme, PMJDY, are set to cross 50 crore this month. It indicates the huge potential of the domestic financial services market and the gold loan NBFCs, armed with new technology tools, have a field wide open to explore.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.