International journal of Innovative Research in Management ISSN 2319 6912

(September-October 2015, issue 4 volume 7)

A Study on Socio-Economic Impact of Gold Loans in India

Nandakumar V.P
Research Scholar
Patna University

Abstract
Gold has a formidable part in showcasing Indian customs and traditions. A woman richly
clad in gold jewellery is a familiar sight in Indian tradition and is a sign of prosperity and
well being in a society. Also, in a rich social heritage filled with celebrations and gaiety, gold
jewellery was always esteemed and in demand. Gifting of gold on auspicious occasions is
also a common tradition in the country. With the rising demand, people also buying gold as
the value of gold assets is rising continuously. On this solid base, the gold loan industry has
huge potential to grow even further as currently it is estimated that less than 2% of the total
gold stock is used for pledging/ obtaining gold loans. The study is conducted to understand
the Socio-Economic impact of gold loans in India and its financial inclusions among
clientele of Manappuram Finance Ltd and other institutions.

Key words: Gold loans, NBFCs, PEST analysis, GAPS.

I. Introduction
Gold has a formidable part in showcasing Indian customs and traditions. Women richly clad
in gold jewellery is a familiar sight in Indian tradition and is a sign of prosperity and well
being in a society. Also, in a rich social heritage filled with celebrations and gaiety, gold
jewellery was always esteemed and in demand. Gifting of gold on auspicious occasions is
also a common tradition in the country.
The organized gold loan market has grown tremendously over the last two years with
significant growth reported by some of the specialized NBFCs. However, recent regulations
introduced by the Reserve Bank of India have slowed down the growth of NBFCs and the
organized gold loan market as a whole. At the same time, the new regulations have made the
operations more transparent and customer friendly (especially in case of NBFCs) and provide
a platform to banks (both public and private) and NBFCs to grow their share in the coming
years.

Regionally, the highest share in gold financing is in Southern India followed by North, West
and East in that order. As the organized gold loan market originated form the southern region,
there is a high dominance of South-based players in the business. Today, these players are
focusing on other regions to maintain the growth momentum. In the coming years, the
organized gold loan market is anticipated to grow at a CAGR of around 25.5% during
FY2012-2015.

People will resort to gold loans to fulfil their short-term needs especially in the urban India.
As per our survey, most of the people are utilizing gold loan for various purposes besides the
usual tendency to use them in financial crisis. The perception of people towards gold loan has
been changing and this will help the organized gold loan industry to grow in the coming
years.

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Since the gold loan market is highly unorganized, the organized segment has a huge potential
for growth through cannibalization of the unorganized segment. A bigger, better and more
efficient network of branches would help the organized segment target this growth area. The
gold loan market in India is still under-penetrated considering the abundant availability of
gold as collateral with Indian private households compared to the existing size of the gold
loan market. There remains significant scope for growth of the gold loan market in India.

II. India Gold Finance Industry An Overview

India has the largest gold stock in the world, i.e. more than 18,000 Metric Tons of gold held
by the Indian households. The country accounts for approximately 10% of the total world
gold stock in 20101. This makes the country, one of the largest gold markets and the demand
for gold is rising continuously. The cumulative annual demand for gold in India will increase
from the present level of 1,000 Metric Tons to more than 1,200 Metric Tons by 2020.

Rural India is having the major chunk of this gold and account for around 65% of the total
gold stock in the country. Regionally, the demand for gold varies with highest demand in the
Southern India, followed by West, North and East 3. Similarly, the regional distribution of
gold loan portfolio displays almost the same pattern with southern India recording the highest
share in gold loan market.

II. PEST Analysis

Political Impact
India is one of the biggest democracies in the world with the federal democratic government.
The country has politically stable economy and its primary objective is the welfare of its
citizens.

The Indian Government does not have any direct impact on the gold loan market. However,
the countrys central bank plays a major role and has recently initiated major steps to exercise
greater control over the organized gold loan market. In March, 2012, RBI had imposed a cap
of 60% on the maximum loan to value (LTV) ratio for gold loans disbursed by NBFCs.
Further, other guidelines were issued by the RBI to increase transparency in the operations of
the gold loan business and to safeguard the interests of the borrower.

The regulations may negatively affect the gold loan business for NBFCs in the short term but
over the long term, the overall gold loan market is set to grow. The gold loan NBFCs need to
consolidate their position first and devise innovative ways to cater to their customer base so
that they are able to return to the growth path.

Economic Impact
Till recently, India was among the worlds fastest growing economies, registering GDP
growth of 7.1% in 20118.Rise in disposable income and growth in industrial (manufacturing)
and services sectors are the major factors driving the economic growth. It is expected to grow
at a significant rate in the coming years. With the continuous growth in the economy, income
levels of people increase and their standards of living improve. Higher incomes give them the
ability to purchase more gold and the availability of financing options will further drive the
gold demand and also help the growth in gold loan industry.

Apart from this, the other major factor is the inflation rate which remained quite high in
recent years. The consumer price inflation in India has been stubbornly high and has hovered
around 9% to 10% in recent years. To curb high inflation rate, the Reserve Bank of India has

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been tightening monetary policy. In the first quarter of 2012, the rupee-dollar exchange rate
also underwent turbulence and the Indian rupee depreciated against the dollar. High lending
rates adversely affect investments as borrowing gets expensive. This can affect the gold loans
market as interest rate will increase for gold financing.

Social Impact
India is the second largest populated country after China. The population in India is
anticipated to reach 1.27 Billion by 2015 from 1.2 Billion in 2011 10. Increase in population
further contributes to the growth in consumer spending and per head disposable income in
India is expected to grow at a CAGR of around 12 during 2010-2015. This will lead to more
purchases of gold and, in turn, will help the organized gold loan players to grow in the future.

Besides, India has a significant portion of the young population and the strength lies in its
youth who are familiarizing themselves to the world beyond their borders. In urban areas, the
majority of the population is working which is positive from the perspective of economic
growth. Due to changing perception of the consumers, they are opting for more gold
financing either for fulfilling their short-term financial needs or purchasing more gold.

However, the size of the Indian middle class is expected to grow from 55 Million in 2005 to
256 Million in 2015 and to 557 Million in 2025, during which it will represent 39% of the
population. Total consumption by middle and high income groups is forecast to grow by 14
times from INR 4 Trillion to INR 56 Trillion over a 20-year period from 200511. This will
also help increasing the organized gold loan market in the country in future.

Technological Impact
Innovation in IT can play the role of a differentiator and facilitate business transformation. As
public sector banks are having the largest share in organized gold loan market, still the
growth rate is slow due to lack of automation system in the approval process for gold loan.

However, some banks have already purchased assaying machines to disburse gold loans in 15
minutes or earlier. This will help in driving the growth in the gold loan business of public
sector banks.

Technology has the potential to play a central role in creating a new transformational
business model. Information technology advancement in banks will create a competitive
business model by reducing approval time, increasing efficiencies, enhancing the customer
experience and generating new revenue streams.

III. Social impacts of Gold Loans:

The areas concentrated were:

1. Life changing experience: The impact of life-changing experiences made possible by

gold loans, e.g. a childs admission to a professional college that is contingent upon payment
of fee instalment before a deadline. Should something like this happen with respect to a
medical emergency, that would be a life-saving experience.

2. Self-employment vs. costs of unemployment: The impact of micro-level

entrepreneurship may be assessed vis--vis the cost of unemployment that would be the case
otherwise. When people are engaged in a productive vocation, they acquire a means of
sustenance and the self-esteem that comes with it. It contributes to their mental as well

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physical well being. In contrast, unemployment can mean (in addition to lack of income) low
self-esteem, dependence on family and/ or government handouts, besides becoming easy prey
to anti-social elements/ activities. That these costs are avoided thanks to a gold loan, would
hint at the positive externalities or social benefits of gold loans.

3. Instils responsibility: There is a sense of responsibility instilled in the gold loan

borrower because of the need to repay (without which the precious jewellery would be lost).
Gold loans are usually taken for useful purposes, and one of the sources of repayment of the
loan would be by tightening your belt and cutting down on discretionary spending. From
foregoing expenditure on simple things like auto rickshaw rides to cinemas, consumption of
meat and fish etc., it can even mean a cutting down on alcohol consumption. Therefore, one
line of enquiry worth pursuing in a subtle way, particularly in the southern states like Kerala,
is whether in a household thats taken a gold loan, the expenditure on alcohol falls after the
gold loan is taken.

4. An introduction to formal sector: Often, a gold loan from an NBFC is the first
experience of the borrower with the organised sector. Since these people lack literacy/
education, they would not have the confidence to walk into a bank and ask for a loan that
requires cumbersome procedures and written documentation. The gold loan NBFCs, with
their simple procedures, eases their entry/ introduction to the formal sector. Once they have
overcome their diffidence about dealing with the organised sector through gold loans, its
possible such people would feel more confident about approaching a regular bank later on.
Therefore, our line of enquiry would be whether gold loan customers graduate more easily to
regular banks than the non-gold loan customers from the same socio-economic class.
A related angle (and seemingly a long shot) that may be worthwhile to look at would be this.
Since gold loans demand (and instil) responsibility from the borrower, would it make the
borrower more responsible later on when availing regular loans from other banks? The idea
is, having been disciplined by the gold loan experience, they acquire a better repayment
culture, which should help matters for the regular banks later on.

Finally, Gold loans:

Reduce poverty.
Reduce vulnerability among the poor.
Extend appropriate financial services to underserved areas or to persons
previously excluded from the banking sector.
Support micro and small enterprises.
Contribute to gender equity.
Help bring marginal groups into mainstream society.

General Survey- Two hundred and twenty three customers were interviewed using the
questionnaire. The branches were spread over five states and one Union territory.
The details of 223 customers are provided below:

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General details

Category Number Percentage

Male 171 77
Sex Female 52 23
Total 223 100
Rural 52 23
Category of Urban 62 28
Household Semi urban 109 49
Total 223 100
Owned 173 78
Type of Rented 49 21
Household Govt Quarters 1 1
Total 223 100
SC 13 6
ST 6 1
Caste OBC 50 24
GEN 153 69
Total 222 100
Below SSLC 29 13
SSLC 60 27
HSC 39 18
Degree 52 23
Education PG 13 6
Professional 9 4
Above PG 0 0
Others 21 9
Total 223 100
Business 75 34
Agriculture 18 8
Small Enterprise 26 12
Govt.Employees 13 6
Ret-Govt.Employees 5 2
Occupation
Pvt. Employees 45 21
House wife 20 9
Students 0 0
Any Other 17 8
Total 219 100
Single 27 12
Married 195 87
Marital Status
Separated 1 1
Total 223 100
Yes 212 95
Bank Account
No 11 5
Yes 82 37
Insurance
No 141 63
12 23 10
Number of
35 179 81
Household
68 21 9
(Members)
Above 8 0 0

IV. Regulatory Landscape and Policy Level Gaps:

The activities of non-banking financial companies (NBFCs) in India have undergone
qualitative changes over the years through functional specialisation. The role of NBFCs
as effective financial intermediaries has been well recognised as they have inherent ability

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to take quicker decisions, assume greater risks, and customise their services and charges
more according to the needs of the clients. While these features, as compared to the
banks, have contributed to the proliferation of NBFCs, their flexible structures allow them
to unbundle services provided by banks and market the components on a competitive basis.
The distinction between banks and non-banks has been gradually getting blurred since both
the segments of the financial system engage themselves in many similar types of activities.
At present, NBFCs in India have become prominent in a wide range of activities like hire-
purchase finance, equipment lease finance, loans, investments, etc. By employing
innovative marketing strategies and devising tailor-made products, NBFCs have also been
able to build up a clientele base among the depositors, mop up public savings and
command large resources as reflected in the growth of their deposits from public,
shareholders, directors and other companies, and borrowings by issue of non-convertible
debentures, etc. Consequently, the share of non-bank deposits in household sector
savings in financial assets, increased from 3.1 per cent in 1980-81 to 10.6 per cent in
1995-96. In 1998, the definition of public deposits was for the first time contemplated as
distinct from regulated deposits and as such, the figures thereafter are not comparable with
those before.
The importance of NBFCs in delivering credit to the unorganised sector and to small
borrowers at the local level in response to local requirements is well recognised. The rising
importance of this segment called for increased regulatory attention and focused supervisory
scrutiny in the interests of financial stability and depositor protection.
In response to the perceived need for better regulation of the NBFC sector, the Reserve
Bank of India (RBI) Act, 1934 was amended in 1997, providing for a comprehensive
regulatory framework for NBFCs( see Annexure 5 for historical evolution of regulations).
The RBI (Amendment) Act, 1997 conferred powers on the RBI to issue directions to
companies and its auditors, prohibit deposit acceptance and alienation of assets by companies
and initiate action for winding up of companies where serious violations are involved. The
Amendment Act provides for entry point norms such as compulsory registration with the RBI
of all NBFCs, irrespective of their holding of public deposits, minimum capital
requirements for commencing and carrying on business of a non-banking financial
institution; maintenance of a portion of public deposits in liquid assets; and creation of
reserve fund and transfer of 20 per cent of profit after tax but before dividend annually
to the fund. Accordingly, to monitor the financial health and prudential functioning of
NBFCs, the RBI issued directions to companies on: acceptance of public deposits;
prudential norms like capital adequacy, income recognition, asset classification,
provisioning for bad and doubtful assets, exposure norms and other measures. Directions
were also issued to the statutory auditors to report non-compliance with the RBI Act and
regulations to the RBI, the Board of Directors and shareholders of the NBFCs.

V. Conclusion and Recommendations:

Gold Loan Market in India
India is one of the largest gold markets with an annual demand of around 700 tonnes as of
2009; Gold stock in India is estimated at around 15,000 tonnes which translates into 10% of
the total global gold stock. (Update: A widely reported November, 2010 estimate by the
World Gold Council puts it at 18,000 tonnes representing 11 percent of the global stock.)
The value of gold in private hands is estimated at around 60 percent of total bank deposits.
Rural India is estimated to hold around 65% of total gold stock.
Organised gold loans market in India is estimated at around Rs. 22,000 -27,000 crores with a
CAGR of ~38% from FY02-09

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Organised gold loans portfolio translates into a marginal 0.12% of the value of total gold
stock in India

Financial impact of gold loans

Gold loans are relevant and appropriate to the requirements of needy poor and middle income
class borrowers. It has the potential to be an effective tool for financial inclusion.
Gold loans are an easily available product that helps in meeting many immediate financial
needs. In other words, financial inclusion by expanding gold loans in the rural areas will
prove a cost effective way to bring the rural masses into the economic mainstream of the
country.
Among the different gold loan players in the organized sector, NBFCs have a pre-eminent
position today having grown rapidly in recent years.
In this context, commendable performance by the Kerala based gold loan NBFCs (like
Manappuram Finance) has brought gold loans to the doorsteps of millions of relatively poorer
and financially excluded households of India.
Gold loan has become one of Indias fastest growing businesses. The entry of organized
sector in recent years; especially the entry of new players like NBFCs into the field of gold
loan has made the business much attractive and it has attained a worldwide attention now.
With a view to compare the status and progress of financial inclusion imparted by the gold
loan operations of Manappuram, a Financial Inclusion Index (FII) has been constructed. A
comparison of the indices of financial inclusion developed with weight and without weight
shows that the former can provide a better picture of the situation highlighting the case of the
low income and below middle income categories
A remarkable aspect of the NBFC, namely Manappuram Finance is their wider coverage of
the low income compared to other income categories. Accordingly, the higher value of the
weighted Financial Inclusion Indices highlights the quality of intermediation operations
carried out by them.
The gold loan contributed incremental capital has caused a higher marginal productivity to
low income compared to high income both in micro and small scale enterprises and
agriculture sectors.
It has also contributed to labour productivity but the higher labour productivity has been with
the high income unlike the case of the higher marginal capital productivity enjoyed by the
low income category.

Social Impact of Gold Loans

Human development is a process of enlarging peoples choices. In principle, these choices
can be infinite and change over time. But at all levels of development, the three essential ones
are for people to lead a long and healthy life, to acquire knowledge and to have access to
resources needed for a decent standard of living.
If these essential choices are not available, many other opportunities remain inaccessible.
Gold loans enable people to overcome shocks, vulnerability recover status in the society.
Despite a tendency to associate it with distress, gold loans have undergone a change in
character in recent years. Today, about one-third of Manappurams gold loan customers
belong to the farming and small business communities (traders, shopkeepers and the self-
employed), who use gold loans for productive purposes because its seen as a hassle-free
source of working capital to meet the needs of day-to-day business.
They also use gold loans for exceptional needs, like building up stock during a busy season.
It is also our observation that even when borrowers have access to regular credit limits from
banks, gold loans continue to be favoured for its flexibility and hassle-free experience.

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Regulatory Landscape
The RBI move would create a gap between bank and NBFC gold loan operations. The banks
are expected to make an aggressive take over on the gold loan segment in the absence of a
strong NBFC presence. its inclination towards gold in the future.
In the current scenario, RBIs recent regulations have hit the top as well as bottom-line of the
NBFCs. In India, gold buying is a regular process, and people are expected to continue.
The regulations may negatively affect the gold loan business in the short term for NBFCs
but in the long term, the overall gold loan market is set to grow as long as the demand for
gold is growing in the country, and NBFCs just need lay the foundation to pick up the pace
again and devise ways to cater to their customer base in an innovative manner.
RBIs guideline is a setback for NBFCs because the new rules require greater capital
adequacy for the financing companies and the thresh hold for the value of loan against gold is
proposed to be at a lower value. This would mean that ornaments of the same value are
expected to result in a lesser loan amount and that too at a slightly higher cost.

Policy Level Gaps

Indias NBFCs play a stellar role in promoting financial inclusion. They have the advantages
of greater last mile reach and low operating cost. With lower costs, break-even is reached
earlier and once profitability is established, the activity becomes self-sustaining.
This is the key difference between financial inclusions as practised by the banks and as
accomplished by NBFCs. For banks, it is not a profit making exercise and therefore
sustainable only as charity funded by other sources/ activities. For NBFCs, it is their bread
and butter.
The need of the hour is a mechanism where banks and NBFCs share the responsibility for
driving financial inclusion and pushing priority sector lending.
A sensible approach would have NBFCs originate credit using their superior last mile
delivery while banks refinance these loans at favourable terms.
With advantages of lower costs, proximity to the customer, and innovative practices in credit
origination, NBFCs can offer a better value proposition to the borrower, good enough to
even neutralise their higher interest rates.
Until 2011, money lent by the banks to NBFCs for onward lending to agriculture and
MSMEs was reckoned under their priority sector lending targets. But now, RBI requires
banks to skirt the NBFCs and lend directly to the priority sector.
Consequently, banks have less incentive to lend to the NBFCs and the anecdotal evidence as
well as media reports indicates that the flow of credit to vulnerable agriculturists and
MSMEs has been affected. In the meantime, banks are nowhere near proving themselves
adequate to the challenge.

Recommendations
NBFCs have been playing a very important role both from the macroeconomic
perspective and the structure of the Indian financial system.
NBFCs are the perfect or even better alternatives to the conventional Banks for meeting
various financial requirements of a business enterprise.
However to survive and to constantly grow, NBFCs have to focus on their core strengths
while improving on weaknesses. They will have to be very dynamic and constantly
endeavour to search for new products and services in order to survive in this ever
competitive financial market.
In recent years, the fact that gold loans are increasingly finding favour with micro-
entrepreneurs (the small business owner, the trader and shopkeeper, the self employed

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etc.) has been well documented in the media. If financial inclusion is reckoned as
inclusion in the wealth creation process, gold loans have a key role to play.
In centre's where organised gold loan players are absent, people who own gold are
deterred from approaching local pawnbrokers because of apprehensions about
unscrupulous practices
Rather than pledge their precious gold, they have preferred to go for unsecured loans from
local moneylenders, paying higher rates of interest in the bargain.
With the arrival of an organised sector gold loan player with better credibility and higher
standards of transparency, this segment switches over to gold loans. It affects the business
of the local moneylenders, who are forced bring down interest rates to preserve market
share
As widely noted in the media response, the cap on LTV reduces the usefulness of gold as a
financial asset that can be used in times of need. In fact, it hurts the poor who are now
forced to borrow from the unorganised sector on more adverse terms.
As NBFCs registered with RBI under Section 45 1A of Chapter III B of the RBI Act, 1934
(as amended in 1997), gold loan NBFCs are fully regulated by the RBI.
However, in Kerala (home to the three biggest gold loan NBFCs in India) there is an
ongoing litigation against the state government which seeks to bring gold loan NBFCs
under the purview of the Kerala Money Lenders (KML) Act, 1957.
The coming years will be very crucial for NBFCs and only those who will be able to face
the challenge and prove themselves by standing the test of time will survive in the long
run.

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Websites:
http://www.manappuram.com
http://www.muthootfinance.com
http://www.muthootfincorp.com

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