Gold loans have existed in India for centuries. The market was, and still is, largely controlled by unorganised institutions that include pawn shops and local money lenders, handing out easy cash against gold jewellery, coins, and bars as security. Pawning, recovery, and re-pawning of gold have been prevalent since ages. However, the high interest charged by the lenders that almost bordered on extortion landed many borrowers in a debt trap. That led to organised and formal financial institutions like banks and NBFCs (Non-Banking Finance Companies) to enter the gold loans sector. They have introduced innovative lending methods at cheaper costs and also ensured better customer service. These organisations now command more than 25% of the Indian gold loan market, which has witnessed phenomenal growth rates over the past decade. It was almost as high as 60% at one point of time. Though the unorganised sector still dominates the country's gold loan market, the organised segment is fast catching up. It grew around 60% in the 2011-12 fiscal, and then by 45% in the 2012-13 fiscal. Over the next couple of years, growth was largely stunted because of the decline in international gold prices. When the bad times hit Gold prices rose by nearly 40% between 2008 to 2013 but collapsed to 1.71% in 2014. It further tanked by 2% the next year with investors exiting exchange-traded funds and a fall in consumption pattern of gold in the country, following regulatory measures to put a fledgling economy back on track. Magma Fincorp, a leading NBFC which entered the gold loans market the second half of 2012-13, narrowed down its business to less than Rs 5 crore in the 2014-15 fiscal, from Rs 100 crore earlier. Capital First had to voluntarily shrink its gold loan portfolio from Rs 575 crore in 2013-14 to Rs 179 crore in the year ending 31 March, 2015. Gold portfolio, as a component of the total assests came down to 1.73% in 2014-15 from 5.74% in 2013-14. The yield on gold lending fell to 3% in mid-2015 from 4.4% a few years back. Regulatory restrictions on the value of gold that could be extended as loans made it uneconomical for most companies because it reduced their loan per unit. The loan to value (LTV) ratio tanked to 60% from 90% before the regulatory intervention was imposed. Short-term outlook Better days for the sector could just be in the offing with Manappuram and Muthoot, two leading gold-lending majors, showing signs of a turnaround. These much-talked-about companies had lost their sheen following a sharp fall in the price of gold, the collateral against which they extend loans. The sizes of their portfolio shrank with a rise in the volume of non-performing assets. At the same time, the custom duty imposed by the government on gold imports, increased the minimum required LTV ratio of the lenders. But the macro environment for the gold loan market seems to be turning around in favour of these companies. Gold, having fallen from Rs 31000 per 10 grams in late 2013 to less than Rs 25000 in mid-2015, has seen some recovery in the past few months. The prices gained by 20% to Rs 30000 a few months into 2016, guided by a rise in the price of the yellow metal in the global markets. It has been observed from market trends in the past that gold prices have a strong correlation with the demand for gold loans. Now, if a customer takes a Rs 70000 loan against gold that's valued at Rs 1 lakh and the price corrects by 20%, then the borrower has to deposit additional gold with the lender to maintain the minimum LTV. But with rising prices, the borrower would be eligible for a bigger loan amount with the collateral value now increased. The two leading gold lenders have since reported a steady growth in profit, an indicator that the market is set to recover, at least in the short-term. The overall loan portfolio of the county, in fact, has already grown by over 6% in the first quarter of this year, with gold and auto loans leading the pack along with secured mortgages. The second edition of the Equifax India Consumer Credit Trends report has revealed that 90-plus per cent delinquency rates, in this period, grew to 1.6%; an 0.08% increase from the preceding quarter, largely because of unsecured loan delinquencies. The future India loves its gold. It accounts for more than 10% of the world's total gold stock, of which, rural India owns nearly 65%. This is probably because banking services are yet to reach the farthest corners of the country and people see gold as the safest asset. Besides, farmers, peasants and daily wage earners often buy gold during the months they have a good income and stock it in the form of jewellery and ornaments. They later pledge this gold to moneylenders and local pawn brokers in the lean months to meet their need for money. This is a peculiar phenomenon in our country and likely to continue in the days to come. At the same time, Indians have an emotional attachment to gold and don't want to sell them off unless a big unexpected expense looms large or in the case of an extreme financial distress. This is what makes gold loans a very attractive business for lenders and feeds the demand for gold loans. The Indian gold loan market, according to conservative estimates, is expected to grow at 15% over the next five years. The gold market in India, as has already been said
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