Banks are a force in gold lending thanks to NBFCs


After the economic devastation caused by two waves of the pandemic, Indian media have broadcast numerous stories of how people in distress are pledging their gold jewelry to make ends meet. There was a report published by a major national daily that particularly caught my attention. It was titled “As Lockdown Eases, Demand for Gold Loans Expected to Increase in Tamil Nadu,” and it was about a woman named Rajalakshmi who, before the pandemic, had worked as a domestic helper in two homes in Chennai. . She then lost her job as people opposed housekeepers or strangers entering their homes. Her husband, who worked as a cook in a small restaurant, also suffered the same fate. As her daughter and son’s school fees were owed, and her savings were not sufficient, she ended up pledging five sovereigns of her gold that she had saved over the past four years.

Here is the part that literally made me sit down. For his gold loan, Rajalakshmi did not go to one of the non-bank financial companies (NBFC) specializing in gold lending, but to a public sector bank. The bank manager who was also in the article reportedly said that in the pre-covid era, 5-7 people came every month to pledge gold, but now customers almost every day came to ask for money. gold loans. Obviously, the gold lending business at the bank was doing very well.

The rise of banks in gold lending: According to the latest monthly data from the Reserve Bank of India (RBI) on the sectoral deployment of bank lending, the outstanding amount of gold loans granted by banks amounts to ??62,221 crore as of June 30, 2021 compared to ??34,267 crore a year ago, a jump of over 80% in just one year. (In June 2019, it stood at ??25,405 crore.) These numbers speak for themselves and it is undeniable that over the past 3-4 years the banking industry has become a force to be reckoned with in gold lending. Should this worry the gold-lending NBFCs? Not at all. In fact, as myself at the head of one of these NBFCs, we welcome the rise of banks in gold lending, convinced that their path was in fact paved by lending NBFCs. Golden. How it happened is a story worth telling.

Gold loans have been around in India for ages, practiced by pawn shops and pawn shops operating in back alleys and alleys across the country. It was a dark world, untouched by regulations, where harsh practices were the norm, including usurious interest rates. It was the entry of gold lending NBFCs into the business that changed the dynamics of this business, bringing modern technology and management methods, and rapid expansion into the rural hinterland and semi-urban.

Gold Lending NBFCs have a unique business model, financing small, marginal borrowers with instant loans. Yes, the cost is higher than what the banks would have charged. But then, these are people who rarely have a regular source of income or documentary evidence to prove their solvency. Without a valid credit score, they face many obstacles in obtaining loans from banks. With exorbitant interest rates from local lenders as a benchmark, the NBFC’s proposed gold lending deal was a compelling proposition, however. By becoming regular borrowers from the gold lending NBFCs, they developed a culture of credit and built a credit history, allowing them to rise through the ranks and access banks in a timely manner.

The Bottom of the Pyramid: This was also the deep insight offered by the late management guru, CK Prahlad, in his acclaimed 2004 book Fortune at the foot of the pyramid. Writing about how the poor suffer when they do not have access to viable sources of credit, he observed: “Credit is often unavailable, or only available from local lenders who charge 10-15% interest. per day. Interest rates of 1,000 to 2,000% per annum are not uncommon. Lucky small entrepreneurs who get loans from a nonprofit microfinance institution still pay 40-70% interest per year, rates that in most developed countries would be considered illegal. ”

He then asks a question: “Doesn’t the ability of a person at the bottom of the pyramid with unstable wages to access credit at 20% rather than 300% improve his income?” As he goes on to explain, poverty reduction is about improving the disposable income of families by reducing the cost of services, improving their quality and thus giving them more time to do productive work. in a few minutes and can then take care of his working day. With any other loan, he would have to submit multiple documents and travel extensively to complete the sanction process, thereby incurring the opportunity cost of lost wages for a day or two, or more.

Today, if we see banks rapidly increasing their gold lending portfolios, it is in large part thanks to the sustained efforts of the gold lending NBFCs. Over the past two decades, they have helped attract millions of marginal borrowers to the formal sector. However, the job is far from over as unorganized pawn shops still hold more than two-thirds of the gold lending market. This is why gold lending NBFCs deserve all the encouragement from policymakers to continue to lead the way for institutional lenders to gain market share from unorganized lenders. Ultimately, we need a lot more examples like Rajalakshmi.

Vice President Nandakumar is Managing Director and CEO of Manappuram Finance Ltd.

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