Market Survey

By: GEETHA G. NAIR

DR JANCY DAVY

A STUDY ON THE ATTITUDE

TOWARDS GOLD LOAN
According 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 With gold loans, small individual players have superseded those in the big cities to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.

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

T
households typically have an emo-
ill a few years back, gold (NBFCs) in the picture, loan against tional attachment and sense of per-
loans were the last re- gold has become all the more popu- sonal belonging to the gold they
sort for borrowers but lar. own, which is usually in the form of
the scene is fast chang- Gold loans are amongst the new- jewellery, coins or bars.
ing with more jewellery est class of assets which have seen According to the World Gold
owners viewing it as an asset to get rapid growth in securitisation. The Council, India accounts for 10 per
smart loans. With the entrance of government views gold loans as an cent of world’s total gold stock, of
non-banking financial companies effective means of meeting the de- which rural India accounts for 65

32 FACTS FOR YOU • April 2014 www.ffymag.com


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
www.ffymag.com April 2014
Market Survey
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.
lying in lockers to avail loans instead Specifically the study tries:
of paying higher interest rates for 1. To gather knowledge about the
pure personal loans. With banks and Indian gold loan market
other financial institutions entering 2. To find the reasons for choos-
this space of late, there has been a ing gold loans over conventional per-
marked increase in personal loans sonal loans
against gold amongst the Indian 3. To know the purposes for avail-
middle class. ing gold loans by the respondents
Significance of the study Methodology
Gold loans have been a part of The study uses both primary and
the world of investments since a secondary data. The primary data
long time now. Many people have has been collected from 100 respond-
also chosen the investment avenue ents on the basis of convenient sam-
to meet their short-term funding pling. The samples were collected
needs. However, over the past dec- from Thrissur town. The secondary
ade or so, gold prices have increased data was collected from published
manifold. With this rise in gold pric- sources such as journals, periodicals
es, the popularity of gold loans has and websites.
also increased; it has now become a
larger investment sector. Gold and domestic saving
Bulk of gold loans are taken to
meet emergency expenditure and In India, the savings habits of
are typically repaid within a few the poor and lower classes differ
months. The present paper tries to significantly from the richer sec-
gain an understanding about the In- tions. While the rich invest their
dian gold loan market and also tries savings across many different kinds
to know the attitude of the custom- of assets, the poor continue to invest
ers towards the gold loans. their savings mainly in gold. In fact,
in rural areas, this is often a necessi-
Objectives of the study ty because of lack of access to banks.
Also, there are strong cultural fac-
This study is descriptive in na- tors at work in India which make
ture and aims to deepen the un- gold not only a desirable but also a
derstanding of the Indian gold loan necessary asset to hold.
market. The study also tries to know Gold is traditionally a store of
the difference between the conven- value, protecting our savings from in-
tional personal loans and gold loans. flationary devaluation. It also serves
Through this study, an attempt is important ceremonial purposes, such
made to know the various purposes as in a wedding celebration where
for which clients acquire gold loans. gold is always the preferred gift.
• FACTS FOR YOU 33
 Market Survey
An overview of Indian Table I Table II
gold loan market Demographic Distribution Preferences for Availing
of the Respondents Gold Loan
India is known to possess large
stocks of gold, estimated at about 11 Demographic Frequency Percentage Number of Percentage
variables respondents
percent of global gold stock. Over the
past ten years, the value of gold in Gender NBFC 31 38.75
India has increased at a compounded Male 54 67.5 Bank 34 42.5
average growth rate (CAGR) of 13 Female 26 32.5 Others 15 18.75
per cent, outpacing the country’s real Total 80 100
Age
gross domestic product (GDP), infla-
Below 30 28 35 Source: Primary Data
tion and population growth by 6 per
cent, 8 per cent and 12 per cent, re- 31-50 37 46
spectively. India has one of the high- 50 and above 15 19 Table III
est savings rates in the world (34 per Education Purpose for Availing
cent of GDP in FY10), of which the Gold Loan
School level 8 10
one third is invested in gold.
Up to PDC 10 12.5 Purpose Number of Percentage
In India, gold prices increased respondents
by a staggering 180 per cent during Up to graduation 21 26.25
Meeting medical 23 28.75
FY06-FY11 and have outperformed Post-graduation 23 28.75 expenses
practically all known asset classes in
Others 18 22.5 Consumption 26 32.5
the last decade. It is estimated that
Occupation smoothing
10 per cent of the country’s gold stock
is pledged as collateral for loans. Government and 24 30 Purchase of 11 13.75
semi-government household assets
The gold loan market in India is
broadly classified into two catego- Private 37 46.25 Education needs 9 11.25
ries, namely, organised sector and Own business 12 15 Others 11 13.75
unorganised sector. Organised sec- Total 80 100
Others 7 8.75
tor primarily constitutes of formal
Monthly income Source: Primary Data
institutions such as banks and NB-
FCs; unorganised sector includes Below ` 25,000 47 59
informal institutions such as private ` 25,000-50,000 23 29 the underlying asset in a gold loan
money lenders and pawnbrokers. is not subject to depreciation. At the
` 50,000 and 10 12.5
However, the market share be- above same time, unlike land, it is a liquid
tween the unorganised and the or- asset and the transaction costs in-
Source: Primary Data
ganised sector is extremely skewed; volved when enforcing the security
approximately 75 per cent is in the are minimal.
unorganised market (money lenders security. In the worst case, the bor- 4. In practice, without recourse:
and pawnbrokers), and the remain- rower may lose his gold but there is Gold loans are effectively given
ing 25 per cent in the organised mar- no debt trap. out on a ‘without recourse’ basis.
ket (specialised NBFCs and commer- 2. Simple procedures, fast dis- Defaults are settled by sale of the
cial/cooperative banks). bursal: The formalities in availing pledged gold and losses (if any) are
The value of the organised gold gold loans are minimal and proce- written off. There are no recovery
loan market in India is estimated at dures are simple. In practice, the agents to go chasing after the bor-
` 400-450 billion, with a CAGR of entire process should hardly take 15 rower and his other properties with
approximately 40 per cent during to 20 minutes. This makes gold loans threats of legal action and court or-
FY02-FY10. ideal for the micro-finance segment ders.
where the loan amounts are small 5. No questions asked: People
Key benefits of gold loan and where there is no point in test- often borrow money on account of
ing the borrower’s patience with an social compulsions which cannot be
1. Avoids debt trap: A gold loan elaborate procedure. avoided in our cultural context; occa-
is settled either by repayment or, in 3. No depreciation of underlying sions such as weddings, festivals and
case of default, by sale of the pledged asset: Unlike other secured loans, religious and social obligations. In

34 FACTS FOR YOU • April 2014 www.ffymag.com


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
www.ffymag.com April 2014
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.
Market Survey
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
• FACTS FOR YOU 35