Market Survey

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By: GEETHA G. NAIR DR JANCy DAVy

A STUDY ON THE ATTITUDE TOWARDS GOLD LOANAccording to a recent estimate by the World Gold Council, there is around 18,000 tonnes of gold lying with individuals in India and as much as 65 per cent of India’s gold lies with people in rural areas. Indian households have been buying gold for generations for socio-cultural, religious and economic reasons. Gold is a store of value and hedge against inflation. With gold prices zooming, borrowers have discovered that they can raise more money with the same collateral. With gold loans, small individual players have superseded those in the big cities to leverage their possession of gold jewellery to avail quick loans for businesses.

Till a few years back, gold loans were the last re-sort for borrowers but the scene is fast chang-ing with more jewellery

owners viewing it as an asset to get smart loans. With the entrance of non-banking financial companies

(NBFCs) in the picture, loan against gold has become all the more popu-lar.

Gold loans are amongst the new-est class of assets which have seen rapid growth in securitisation. The government views gold loans as an effective means of meeting the de-

mand for micro-finance in India.Gold loans have become a basis

for creation of new financial prod-ucts such as loans for purchase of gold wherein gold is purchased on the date of loan and held as a pledge until the equated monthly instal-ments are paid.

The present paper tries to gain an understanding about the Indian gold loan market and also tries to know the attitude of the customers towards the gold loans. The paper utilises both primary and secondary sources for collecting the data. To know the attitude of the customers, information has been collected from 80 respondents.

India is one of the biggest mar-kets for gold and gold loan. Indian households typically have an emo-tional attachment and sense of per-sonal belonging to the gold they own, which is usually in the form of jewellery, coins or bars.

According to the World Gold Council, India accounts for 10 per cent of world’s total gold stock, of which rural India accounts for 65

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per cent of the total gold stock. Gold jewellery provides immense consum-er satisfaction and also serves as an appreciating asset—a rare, socially valuable combination. There has been a high demand for gold in In-dia, irrespective of prices.

During 2001-12, the annual de-mand for gold remained relatively stable at around 700 to 900 tonnes despite constant rise in prices during the last ten years. Though gold is a highly liquid asset, it was not until recently that consumers leveraged it effectively to meet their liquidity needs.

With gold prices zooming, bor-rowers have discovered that they can raise more money with the same collateral. Lenders provide loans by securing gold assets as collateral. Compared with the rest of the world, in India the gold loan market is a big business.

Traditionally, gold loans were provided only by informal market players, however, over the last few decades, there has been a consider-able shift in this scenario as a pool of specialised financial institutions called NBFCs have emerged catering to the financial needs of low-income households.

Gold loan is a simple modifica-tion of the age-old practice by money lenders and has been institutional-ised by the banks now. In this loan, one has to deposit the household gold in the form of jewellery with the bank or financing agency and get a loan up to 60 per cent of the gold de-posited. It requires proper documen-tation such as submission of election card/Aadhar card as identity proofs and PAN cards for income proof.

Statement of problem

The value of gold has been on the rise for the last century uninter-rupted and is currently touching un-precedented heights. Thus, it makes sense to utilise the power of the gold

lying in lockers to avail loans instead of paying higher interest rates for pure personal loans. With banks and other financial institutions entering this space of late, there has been a marked increase in personal loans against gold amongst the Indian middle class.

Significance of the study

Gold loans have been a part of the world of investments since a long time now. Many people have also chosen the investment avenue to meet their short-term funding needs. However, over the past dec-ade or so, gold prices have increased manifold. With this rise in gold pric-es, the popularity of gold loans has also increased; it has now become a larger investment sector.

Bulk of gold loans are taken to meet emergency expenditure and are typically repaid within a few months. The present paper tries to gain an understanding about the In-dian gold loan market and also tries to know the attitude of the custom-ers towards the gold loans.

Objectives of the study

This study is descriptive in na-ture and aims to deepen the un-derstanding of the Indian gold loan market. The study also tries to know the difference between the conven-tional personal loans and gold loans. Through this study, an attempt is made to know the various purposes for which clients acquire gold loans.

Specifically the study tries: 1. To gather knowledge about the

Indian gold loan market2. To find the reasons for choos-

ing gold loans over conventional per-sonal loans

3. To know the purposes for avail-ing gold loans by the respondents

Methodology

The study uses both primary and secondary data. The primary data has been collected from 100 respond-ents on the basis of convenient sam-pling. The samples were collected from Thrissur town. The secondary data was collected from published sources such as journals, periodicals and websites.

Gold and domestic saving

In India, the savings habits of the poor and lower classes differ significantly from the richer sec-tions. While the rich invest their savings across many different kinds of assets, the poor continue to invest their savings mainly in gold. In fact, in rural areas, this is often a necessi-ty because of lack of access to banks. Also, there are strong cultural fac-tors at work in India which make gold not only a desirable but also a necessary asset to hold.

Gold is traditionally a store of value, protecting our savings from in-flationary devaluation. It also serves important ceremonial purposes, such as in a wedding celebration where gold is always the preferred gift.

Gold loan is a simple modification of the age-old practice by money lenders and has been institutionalised by the banks now. In this loan, one has to deposit the household gold in the form of jewellery with the bank or financing agency and get a loan up to 60 per cent of the gold deposited.

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An overview of Indian gold loan market

India is known to possess large stocks of gold, estimated at about 11 percent of global gold stock. Over the past ten years, the value of gold in India has increased at a compounded average growth rate (CAGR) of 13 per cent, outpacing the country’s real gross domestic product (GDP), infla-tion and population growth by 6 per cent, 8 per cent and 12 per cent, re-spectively. India has one of the high-est savings rates in the world (34 per cent of GDP in FY10), of which the one third is invested in gold.

In India, gold prices increased by a staggering 180 per cent during FY06-FY11 and have outperformed practically all known asset classes in the last decade. It is estimated that 10 per cent of the country’s gold stock is pledged as collateral for loans.

The gold loan market in India is broadly classified into two catego-ries, namely, organised sector and unorganised sector. Organised sec-tor primarily constitutes of formal institutions such as banks and NB-FCs; unorganised sector includes informal institutions such as private money lenders and pawnbrokers.

However, the market share be-tween the unorganised and the or-ganised sector is extremely skewed; approximately 75 per cent is in the unorganised market (money lenders and pawnbrokers), and the remain-ing 25 per cent in the organised mar-ket (specialised NBFCs and commer-cial/cooperative banks).

The value of the organised gold loan market in India is estimated at ` 400-450 billion, with a CAGR of approximately 40 per cent during FY02-FY10.

Key benefits of gold loan

1. Avoids debt trap: A gold loan is settled either by repayment or, in case of default, by sale of the pledged

security. In the worst case, the bor-rower may lose his gold but there is no debt trap.

2. Simple procedures, fast dis-bursal: The formalities in availing gold loans are minimal and proce-dures are simple. In practice, the entire process should hardly take 15 to 20 minutes. This makes gold loans ideal for the micro-finance segment where the loan amounts are small and where there is no point in test-ing the borrower’s patience with an elaborate procedure.

3. No depreciation of underlying asset: Unlike other secured loans,

Table I

Demographic Distribution of the Respondents

Demographic variables

Frequency Percentage

Gender

Male 54 67.5

Female 26 32.5

Age

Below 30 28 35

31-50 37 46

50 and above 15 19

Education

School level 8 10

Up to PDC 10 12.5

Up to graduation 21 26.25

Post-graduation 23 28.75

Others 18 22.5

Occupation

Government and semi-government

24 30

Private 37 46.25

Own business 12 15

Others 7 8.75

Monthly income

Below ` 25,000 47 59

` 25,000-50,000 23 29

` 50,000 and above

10 12.5

Source: Primary Data

the underlying asset in a gold loan is not subject to depreciation. At the same time, unlike land, it is a liquid asset and the transaction costs in-volved when enforcing the security are minimal.

4. In practice, without recourse: Gold loans are effectively given out on a ‘without recourse’ basis. Defaults are settled by sale of the pledged gold and losses (if any) are written off. There are no recovery agents to go chasing after the bor-rower and his other properties with threats of legal action and court or-ders.

5. No questions asked: People often borrow money on account of social compulsions which cannot be avoided in our cultural context; occa-sions such as weddings, festivals and religious and social obligations. In

Table II

Preferences for Availing Gold Loan

Number of respondents

Percentage

NBFC 31 38.75

Bank 34 42.5

Others 15 18.75

Total 80 100

Source: Primary Data

Table III

Purpose for Availing Gold Loan

Purpose Number of respondents

Percentage

Meeting medical expenses

23 28.75

Consumption smoothing

26 32.5

Purchase of household assets

11 13.75

Education needs 9 11.25

Others 11 13.75

Total 80 100

Source: Primary Data

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gold loan, money is advanced solely on the criterion of the value of gold pledged and questions about the pur-pose of the loan would only be to con-firm that anti-social or wildly specu-lative activities are not involved.

6. Suited for the unorganised sector: Gold loans are ideal for those employed in the informal or unor-ganised sector and do not have docu-ments to prove their income. This is a segment conventional banks gen-erally avoid because their appraisal and credit scoring is based on formal documentation. Incidentally, more than 90 per cent of India’s workforce is in unorganised sector.

7. Gains for the wider economy: India has the world’s largest stock of privately held gold with informed esti-mates ranging from 15,000 to 20,000 tonnes. When people borrow against gold (technically called ‘monetisa-tion’), the impact is to set in motion a whole new chain of economic activity

boosting demand and consumption expenditure in the economy.

Findings

1. 67.5 per cent of the respond-ents were male

2. 46 per cent of the respondents were from the age group 31-50

3. Educational qualification for majority of the respondents was post graduation

4. 46 per cent of the respond-ents are private sector employees followed by government and semi-government employees

5. 59 per cent of the respondents are from the monthly income group below ` 25,000 and 29 per cent are from the income group ` 25,000-50,000.

6. Majority of the respondents (42.5 per cent) prefer banks for availing gold loans, 38 per cent prefer NBFCs and 18 per cent prefer other sources.

7. Gold loans were taken by the majority for their consumption smoothing (32 per cent) and 28 per cent for meeting medical expenses.

Conclusion

For borrowers, gold loans have emerged as one of the best means of raising quick, short-term capi-tal. Gold loans were preferred over conventional personal loans due to less procedures, fast disbursement and easy instalments. The study shows that the respondents pre-ferred gold loans from the banks, and most of the respondents use the fund for their consumption smoothing.

Geetha G. Nair is a research scholar, Re-search and P.G. Department of Commerce, St. Josephs’ College, Irinjalakuda and Dr Jancy Davy is an associate professor, Research and P.G. Department of Com-merce, St. Josephs’ College, Irinjalakuda