Does the gold loan market offer a billion-dollar opportunity? And who's tapping it!
By Rachita Kumar and Harry Kapoor
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More than 100M small traders and wage labourers lost their jobs due to the pandemic. Have you ever thought how are they making the ends meet?
A fact: India is the largest importer of gold, importing 700-800 tonnes of gold annually in volume terms, and Indian households are the largest holders of the precious metal, piling up around 24,000-25,000 tonnes of gold worth about $1 trillion. That’s almost equal to Indonesia’s GDP!
Wondering how the two are linked? Imagine the life of those who lived their lives hand-to-mouth. Pandemic left them with no choice but to take loans against their hard-earned gold jewellery as collateral.
When most industries have been negatively impacted by the pandemic and are expected to contract or register flat growth for the fiscal year of 2021, the gold loan companies are experiencing a surge in loans. Muthoot Finance, one of the largest gold loan NBFCs in India, is looking to achieve a 15% growth in the gold loan portfolio for FY21, and reported a 52% increase in its first-quarter consolidated net profit and a 16% growth in the consolidated assets under management (loan book).
Some of the factors that have helped these gold lenders are - rise in gold prices (gold prices have risen by over 33% YTD as of 10th Sept'20) and the relaxation of Loan-to-Value requirements by RBI from 75% to 90%. Which means gold pegged at Rs. 100 can be used as collateral to take Rs. 90 worth of loan vs. Rs. 75 earlier.
We anticipate the rise in gold loans to continue in the coming years. The financial sector has been facing hurdles since the IL&FS default in 2018, and now Covid19 has caused an increase in customer defaults, moratorium and restructuring. Though this could be an opportunity in disguise for gold lenders. A lot of lenders, though cautious of giving unsecured loans, are comfortable giving loans backed by a liquid asset such as gold. Further, pledging gold is becoming more lucrative with rising prices as we mentioned above.
With so much action happening on the gold lending front, let's look at some key stats that characterize the gold loan industry:
1 in 10 households buy gold annually or even more frequently, and gold is usually purchased in the form of jewellery, followed by coins/ bar
Source: KPMG report
India's unorganised gold loan market is estimated to be 65% of the total gold loan market. We'll soon deep-dive on why so
About 4-5% of India's gold holding is pledged in the organised market
Gold finance is dominant in South India. South India holds 40% of the total gold stock in India. 52% of the gold loans are from South India
Gold loans are generally short term in nature - Greater than 50% of the gold loans have a tenure of 1-3 months
While banks make up a large share of the organised lending sector, the rural organised gold loan market is mostly dominated by non-banking financial companies (NBFCs). 2 NBFCs - Muthoot Finance and Manappuram Finance constitute 80% of the NBFC lending market.
Now, let's understand why do Indians buy gold and borrow against gold. And why do they borrow from unorganised lenders (pawn shops) who charge exorbitant interest rates?
Rural India is estimated to hold around 65% of the total gold stock. The primary reason for them to buy gold is for use during emergency situations since gold loans are easily available with minimal procedural requirements. The second most common reason for buying gold is that gold is considered auspicious in India, and people buy gold during festivals, marriages, etc.
Gold is one of the most liquid assets i.e it can be easily converted back to cash. A large portion of the rural population relies on gold loans, since they have limited access to credit either because of their inability to meet the eligibility requirements of banks and financial institutions or because credit is not available in a timely manner, or not at all. As a result, they end up borrowing against gold from unorganised lenders who charge interest rates as high as 30-60%, compared to 10-24% charged by formal lenders.
As per a survey conducted by IFMR, the borrowers choose the informal lenders primarily due to proximity to home. In cases where clients acquire a gold loan for an emergency purpose, people do not value the difference in interest rates, as much as they would value quicker availability of loans from a nearby pawn shop. They get the loan almost instantly from a local moneylender vs. banks which have lengthy processes and documentation requirements. The second factor for people choosing informal lenders was ‘sharing a comfortable relationship with the service provider’. Since most of the informal local moneylenders know the people personally, they both share a much more comfortable relationship.
Source: KPMG report
Whitespaces leading to entry of startups in gold loan segment:
As we highlighted above, gold loan is a highly underpenetrated market in India, dominated by informal lenders. Banks do not have gold lending as a core focus since it requires the bank to appoint valuers for valuing the gold, undertake processes to check the purity of loan, arrange for the transportation of gold and participate in auction processes in case the borrower defaults. Further, banks (especially PSUs) generally focus on gold loans which can be classified as Priority Sector under the agriculture segment, and not on retail gold loans. Moreover, since gold loans are micro-loans with a ticket size of less than Rs50,000 and a short tenure, banks would need to reach out to a large base of borrowers on a frequent basis to grow their loan book, as against simply giving a loan of Rs 5,00,000 to an individual to buy a car that is to be repaid over 3-5 years.
Gold loan NBFCs have robust underwriting practices and significant presence through branches in rural India, however, they are not tech first and rely on age-old practices to disburse and collect the loans. Digital transformation has been underway in the financial services sector, which has been further accelerated by Covid19. We are not only seeing traditional banks embrace technology but also the emergence of new business models such as neobanks.
Hence, there exists a whitespace (opportunity) for digital lenders in the gold segment. Given the attractiveness and safety of gold loans, we have seen a few startups emerge in this segment in the past few years, Rupeek being the poster boy for gold loan startups. Such digital lenders are well placed to cater to the growing credit demands of the millennial population, who want to fund a vacation, make a down payment on a home, or get around a bad credit score, but do not want to get into the long and complicated procedure associated with bank loans. They would rather have a short term loan sanctioned through an app.
Opportunity size
Total gold holding in India (tn) 24,000 Gold price (Rs/gm) 5,000 Value of gold holding (Rs bn) 1,20,000 Gold loan potential size (@75% LTV conservative) (Rs bn) 90,000 Organised gold loan business (%) 5.5 (as per KPMG report) Current outstanding gold loans (Rs bn) 4,950 = Rs. 4,95,000 crore
For context, Manappuram AUM = Rs. 15,000 crore (~3% of total organised market)
And with an overall AUM of ~22k crore, Manappuram is today valued at Rs. 135B, i.e. ~$2B. A tech co. operating without branches and at a faster growth rate would perhaps demand a higher valuation at that AUM, but it would still take several years to build an equally large AUM and thus cross $1B valuation, but it's definitely quite feasible, even with a single-digit market share. The upside for such a company is much more as it would also launch other lending products eventually.
Note: Numbers used are rough approximates for the purpose of guesstimate.
Few best practices that would enable the digital lenders to capture a sizeable market share:
At home loans: There is a feeling of embarrassment when borrowing against family jewellery and hence people are hesitant of being seen at a pawn shop or a gold loan lender branch. This is especially true in North India. Digital lenders should have the facility of offering gold loans at home, thus saving the family member from the ignominy of being seen pawning the family jewellery. This can go a long way in getting customers to borrow from the digital lender vs. the pawnshop/ NBFC.
Quick disbursals: Indians are suspicious of strangers handling their gold, so not only having the agent to pick up loan at home, but also having the agents stay at the borrower’s home or office until the money arrives in the borrower's account is a good practice to build instant confidence in the borrower that the lender won't run away with their gold.
Competitive interest rates and flexible repayment structure: This goes without saying that competitive interest rates, no processing fees/ additional charges on top of interest and flexible repayment structure would attract customers. Rupeek benchmarks its interest rate against competitors and highlights savings in case loan is taken from Rupeek.
Launch innovative products: Rupeek is introducing a “gold locker” product to hook consumers who are queasy about the words “gold loan”. A user can deposit his ornaments in a gold locker and borrow against them. The company is also testing a mobile-based debit card that’s linked to the gold stored. Such innovative business models can help the digital lender to differentiate against the traditional lenders.
Challenges faced by gold loan startups:
Building trust: Giving away one's gold as collateral is not just a financial decision, but also an emotional one. Both the monetary and emotional value of gold makes the customer highly cautious and they would not care about the interest rate as much as they would about the lender's credibility. Gold loan industry is also tainted by bad practices. People might have the impression that gold loan companies could run away with their gold. Hence, building trust is key in this market. Online non-branch led lenders would have to go the extra mile to build this trust, either in partnership with banks or in other ways such as onboarding celebrities (like Manappuram brought in Akshay Kumar and other regional actors)
Operational challenges: Other than ensuring robust underwriting practices, gold loans require additional technical requirements such as appoint a valuer, evaluate purity of gold, ensure security of gold etc. Though these are operational requirements and can be solved for, ensuring standardization and consistency in operations at scale is the key in gold lending
Robust underwriting and collection practices: Industry veterans say lending is not a game of origination, but of collection. We all know what happened with Yes Bank. On similar lines, while online gold lenders can originate loans worth crores of Rupees, the real test will be their ability to underwrite those well and achieve collections and default rates similar or even better than banks/ NBFCs
Emergence of gold loan-as-a-feature: A lot of non-fintech companies already rely on lending-as-a-feature. Ola lending to its drivers, Byjus giving loans (through partner bank) to parents to purchase its subscription, Udaan extending credit to the sellers etc. On similar lines, we could see the emergence of gold loan-as-a-feature. Let us explain this with a hypothetical example. Amazon recently launched its gold offering, allowing users to buy digital gold. Amazon has partnered with SafeGold for this offering. In a similar manner, Amazon can partner with lenders and can extend credit to users/ merchants using gold as collateral. Why would a lender partner with Amazon you would ask. Amazon has a distribution network i.e. access to millions of customers buying on its platform and merchants selling through Amazon. It has access to a trove data on both seller and user side - Seller's data such as the selling history, customer feedback, compliance with Amazon policies and guidelines etc; User data such as average order value, discretionary vs non-discretionary spend, the preferred mode of payment (EMI/ cash/ credit card can help access credit worthiness and paying capacity of a user). After all, Amazon already has a lending arm in partnership with Capital First, where it extends credit to sellers based on certain criteria. What would stop Amazon from using this data and partnership to extend gold loans and build gold-loan-as-a-feature. Hence, the gold loan startups could end up competing not only with other focused lenders but also will all the non-fintech companies extending gold loans to their partners. The lending landscape is very crowded (see image below) and if gold loans-as-a-feature takes off, the competition could further intensify.
Aggressive lending: Aggressive lending on the back of rising prices can prove dangerous if gold prices fall, as it happened during 2013-2015. Gold loan financiers expanded business at an astronomical pace in 2010 and 2011 as gold's price zoomed, and more & more people pledged the metal to avail of cheaper loans. However, as gold prices declined from Rs 3,100/gm in Rs 2,600/gm in 2015, borrowers defaulted as the principal plus accrued interest surpassed the value of the gold pledged
Understanding the user persona pan-India and catering to them: We know that 65% of the gold loan market is in rural areas, which do not have the best infrastructure. Building a safe, high trust model there would be a challenge. Even in Urban India, we know that ours is a country of diverse cultures, socio-economic backgrounds and beliefs. Hence the user persona varies widely across the length and breadth of India. There will be multiple factors that one has to get right such as income level, geographies, micro-markets, professions etc. when finalising the TG. Knowing the customer well, like in most businesses, will decide the future of the lending company
The gold loan market is definitely at an interesting juncture and startups which are able to build robust practices and establish trust in the minds of consumers will be the last ones standing in this hyper-competitive market!
That's all for today. Hope you enjoyed reading and the piece intrigued you to deep-dive further! Share this with friends who might find it useful and subscribe if you haven’t already.
Sources
Gold savings out of total savings- https://timesofindia.indiatimes.com/business/india-business/Households-hold-950bn-gold-in-India/articleshow/10987660.cms
Demonitization impact on gold- https://www.motilaloswal.com/blog-details/The-Rise-and-Fall-of-Gold-Prices-after-Demonetization-in-India/1130
Omnichannel experience in fintech and gold - https://tech.economictimes.indiatimes.com/news/internet/fintech-lenders-go-omni-channel-for-healthy-book/70651078
Gold loan market reports
Informative Blog. Thanks for sharing