Gold loan: Industry information

Underlying asset dynamics

In India, gold plays a pivotal role in peoples social and economic life. Besides, individuals are highly
sentimental about gold, as buying gold is considered auspicious. However, as times change, the yellow
metal is also being viewed as an investment, the value of which appreciates over years and provides a
hedge against inflation. Gold is also considered as an asset that can be pledged easily to avail of funds in an
emergency or can be liquidated.
India is one of the largest markets for gold in the world, consuming 842 tonnes in 2014 (or 26% of global
demand). While gold jewellery constitutes about 80% of overall demand, gold bars and coins comprise the
balance. Even the substantial rise in gold prices over the years (See chart below) failed to dent demand for
gold in India.
Demand trend for gold in India and prices
(tonnes)
1,200

(Rs./ gms)
3,500
2958

2644

1,000
2385
800

3,000
2484
2,500

2051

2,000

600
1,500
400

1,000

200

500

2010

2011

2012

Gold bars & coins investment (LHS)

Average Gold prices (RHS)

2013

2014

Jewellery (LHS)

Source: World Gold Council

Besides the usual set of socio-economic aspects, prices and the rate of return on alternate financial assets
are the major factors driving gold demand in India. Recently, uncertainty in real estate and equity markets
made gold an attractive investment option. The yellow metal also outperformed other investment avenues
over the last 5 years, making it the most preferred investment option.

CRISIL Research: Gold loan

Recent regulations and its impacts
India meets most of its gold requirement through imports. Robust demand and high gold prices weigh heavily
on the country's current account deficit (CAD), especially at times when export growth decelerates. Hence, in
order to curtail the CAD, the government, along with the Reserve Bank of India (RBI), took a number of steps
in terms of raising the import duty and restricting gold imports. Since the start of 2013, the government has
consistently hiked the import duty from 4% to 6% in January 2013 to 8% in June 2013 and 10% in August
2013. Moreover, the RBI, in its notification dated July 22, 2013, stated a 20/80 principle for importers,
wherein 20% of the gold imported should be made available for exports.

Shortage of gold for gems & jewellery manufacturers coupled with a rising inflow of the yellow metal through
unofficial channels forced authorities to relax some of the gold import curbs at the beginning of 2014-15. In
light of such developments and a lower CAD, the RBI gained some room to ease regulations.
Regulations eased in 2014-15

Features of gold loan

A gold loan is the financial assistance given by a bank or a financial institution against the total gold pledged
by the borrower. Gold loans are generally meant for individuals who require urgent cash to fulfil a sudden
financial need like medical emergency/ education or a start-up loan (in the case of SMEs etc). However, with
changing times, a gold loan is also used as an instrument to unlock the economic value of the yellow metal,
which is generally an idle asset in the hands of individuals.

How does pledging gold benefit?

Secured loan

Loan is borrowed against the gold deposited by the applicant.

Multi-purpose

The loan can be used for any purpose, as long as it is not for any illegal activity or speculation in the
stock market. NBFCs place even fewer restrictions on the use of loan.

Instant loan

NBFCs and the unorganised sector disburse loans at a much faster pace (as low as three minutes to a
few hours) as compared with banks which may take a few days.

Shorter loan tenures

There is no minimum period for the loan, and, if need be, one can return the loan amount the very next
day. The average tenure of the loan is 90-100 days.

Varied interest rates

Interest rate depends on the tenure and amount of loan. It varies from 11-17% in the case of banks,
while for NBFCs it could reach 24%. The interest rates charged by the unorganised segment can range
from 30-50%.

Repayment flexibility

Repayment can be structured as just interest amount with principal being repaid at the end of the period
in one lump sum. Repayment through EMI, covering interest as well as principal, is also an option.

Source: CRISIL Research

Banks vs NBFCs
Interest rate

Loan-to-value

Loan tenor

Average Ticket Size

Banks

11% - 17%

75%

8-12 months

70,000 - 75,000

NBFCs

17% - 22%

75%

8-12 months

30,000 - 40,000

Source: CRISIL Research

CRISIL Research: Gold loan

Personal loan vs gold loan

Type of loan

Personal loan

Gold loan

Kind of loan

Unsecured

Secured

Duration of loan

Maximum 60 months

Maximum 12 months

Rate of interest

18 to 25 per cent

11-17% by banks / 17-22% by NBFCs

Ease of availing

Not easy as repayment capabilities needs to

be proved.

Easy as applicant only needs to have gold for pledging.

Repayment options

A fixed amount, including the interest as well

as principal, needs to be paid at regular
intervals.

Borrower gets option of paying interest at regular

intervals or bullet repayment, i.e. interest and principal
paid in lump-sum at the end of the loan tenure.

Source: CRISIL Research

Typical gold loan disbursement process (NBFCs)

Customer walks in and is

explained various
schemes offered

Customer selects the

scheme and provides
necessary documents

Appraiser conducts
specific weight and quality
tests of the gold

Loan disbursed and

ornaments kept in the
strong room along with
appraisal certificate

Manager does the

verification and sanctions
the loan at prescribed
advance rate

Pledge form is then printed

and handed over to the
manager along with the
ornaments

Customer repays the loan

and discharges the pledge
form

Ornaments received from

strong room and handed
over to the customer

Source: Industry, CRISIL Research

Regulatory framework
Overview of NBFC sector
An NBFC is a company registered under the Companies Act, 1956, and is engaged in the business of loans
and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local
authority or other securities of marketable nature, leasing, hire-purchase, insurance business, chit business,
but does not include any institution whose principal business is that of agriculture activity, industrial activity,
sale/purchase/construction of immovable property.
NBFCs have been classified on the basis of the kind of liabilities they access i.e. deposit and non-deposit
accepting, non-deposit taking NBFCs by their size into systematically important and other non-deposit
holding companies (NBFC-ND-SI and NBFC-ND) and by the kind of activity they conduct.
The different types of NBFCs are:
1. Asset financing company (AFC)
2. Investment company (IC)
3. Loan company (LC)
4. Infrastructure finance company (IFC)
5. Systemically important core investment company (CIC-ND-SI)
6. Infrastructure debt fund (IDF)
7. Microfinance institution (NBFC-MFI)
8. Factors (NBFC-Factors)

However, there is no separate classification for gold loan companies. They are classified as AFCs.

Regulatory framework for gold loan NBFCs

Regulations presently applicable to non-deposit taking NBFCs also apply to gold loan NBFCs. These are:

i)

Requirements pertaining to capital adequacy

NBFCs are required to have a capital-to-risk weighted assets ratio of 15%. While the tier-I capital for other
NBFCs is set at 10%, tier-I capital requirement for gold loan NBFCs is set at 12%.

ii)

Asset classification

Gold loan NBFCs shall, after taking into account the degree of well-defined credit weaknesses and extent of
dependence on collateral security for realisation, classify their loans and advances and any other forms of
credit into the following classes, namely:

CRISIL Research: Gold loan

1. Standard assets
2. Sub-standard assets
3. Doubtful assets
4. Loss assets

iii)

Provisioning requirements

At present, every NBFC is required to make a provision for standard assets at 0.25% of the outstanding. On
a review of the same, the provision for standard assets for NBFCs-ND-SI and for all NBFCs-D is being
increased to 0.40%. Compliance with the revised norm will be in a phased manner as given below:

0.30% by the end of March 2016

0.35% by the end of March 2017

0.40% by the end of March 2018

Provisioning norms for loans and advances

Type of asset

Period for which loans

and advances are overdue

Provision %
of outstanding

Sub-standard

Up to 12 months

10

Doubtful (Secured)

Up to 12 months

20

Doubtful (Secured)

12 to 36 months

30

Doubtful (Secured)

More than 36 months

50

Doubtful (Unsecured)

Not applicable

100

Loss

Decided by company

100

Source: RBI, CRISIL Research

iv)

NPA recognition norms

NBFCs were hitherto required by the Reserve Bank of India (RBI) to recognise NPAs as loans in which either
interest or principal payments were outstanding for over 180 days. In November 2014, the RBI revised the
guidelines, requiring NBFCs to adopt a 90-day NPA recognition by March 2018, which is at par with banks.
NBFCs would be required to progress to 150-day, 120-day and 90-day recognition by March 2016, March
2017 and March 2018, respectively.

Key growth drivers & risks

Key growth drivers
Changing customer attitude
A shift in customer perceptions towards pledging gold will be the biggest success factor for gold loan
companies in future. Traditionally, in India, people are reluctant to pledge jewellery or ornaments for
borrowing money. However, as more people are now viewing gold as an important instrument of savings that
is also liquid, demand for gold loans will witness a steady rise.

Low penetration in North and West and broadening customer base

Approximately 70% of the gold loan market is concentrated in Karnataka, Andhra Pradesh, Kerala and Tamil
Nadu. However, the vastly underpenetrated northern and western markets provide a huge expansion
potential for gold loan companies. Also, shift from the predominant customer base (farmer households, low
and middle income households) to businessmen (who avail of gold loans to meet regular working capital
requirements) offer a broader customer base in the future. However, the new RBI regulations for big ticket
loans could prove to be a dampener.

Key risks
Fluctuation in gold prices
Any volatility in gold prices tends to affect lenders as gold is an underlying asset in this business. Rising
prices of gold tend to boost both demand as well as supply for gold loans, as households holding gold are
encouraged to seek credit by pledging the gold. Moreover, banks and NBFCs are encouraged to lend more
against gold as it is deemed to be safe collateral. On the other side, a fall in gold prices may deteriorate the
asset quality of the lenders as chances of a default by the borrower increases if there is a considerable fall in
prices of gold. Since the tenure of the loans is short, any increase in short-term volatility of gold prices could
impact the profitability of gold loan companies.

Change in regulatory environment

The regulatory environment will play a crucial role in deciding the growth of gold loan companies in the
coming years. Given the sectors high exposure to the low income category, specific regulatory actions
(similar to those seen in the case of microfinance institutions) have the potential to disrupt the market.
Measures such as capping the loan-to-value (LTV) ratio, mandating issuance of high value loans only
through cheques, prior approval of the RBI for opening branches in excess of 1,000 for NBFCs, may affect
the competitive position of NBFCs against banks extending gold loans. However, regulations issued in
January 2014 for banks and NBFCs, pertaining to the loan-to-value ceiling and standardisation of valuation
of collateral are viewed as level playing for organised players.

CRISIL Research: Gold loan

Increasing competition
Over the past few years, competition in the gold loan market has increased significantly. Traditionally, banks
were leaders as gold loans helped them meet the stipulated priority sector lending target. However, seeing
the enormous growth potential of the market, several NBFCs also became very active, and have been
successful in competing with the banks.