Cognizant 20-20 Insights

Surveying the Indian Gold Loan Market

Executive Summary
Gold has long been a valued commodity, particularly in India where it is considered auspicious,
and has been in use for centuries in the form of
jewelry, coins and other assets. Though gold is
a highly liquid asset, it wasnt until recently that
consumers leveraged it effectively to meet their
liquidity needs.
Lenders provide loans by securing gold assets as
collateral. Compared with the rest of the world, in
India the gold loan market is big business. Until a
decade back, most of the lending was in the unorganized sector through pawnbrokers and money
lenders. However, this scenario changed with
the entrance of organized sector players such
as banks and non-banking finance companies
(NBFCs) which now command more than 25% of
the market.
The organized gold loan market has grown at
40% CAGR from 2002 to 2010. NBFCs have been
a major driving force behind this growth given
their extensive network, faster turnaround time,
higher loan-to-value ratios and the ability to
serve non-bankable customers. Of late, banks
have improved their gold loan product features
and services. Coupled with comparatively lower
interest rates and charges, banks stand to gain
market share at the expense of NBFCs in the near
future.
With rapid growth, regulatory scrutiny has
increased on gold loan lending practices. NBFCs
are under greater focus as a result of their higher
interest rates and charges, and non-adherence to

cognizant 20-20 insights | january 2012

know your customer (KYC) regulations. This may

further impact the dominance of NBFCs in the
gold loan market.
At just 1.2% of the total gold stock in the country
at present, gold loans have a huge growth
potential. However, firms need to develop distribution, product and risk mitigation strategies to
get a share of the pie in a profitable and sustainable fashion.

Background: Gold and the

Indian Society
As previously noted, gold has traditionally
been among the most liquid assets and is an
accepted universal currency. It has traditionally
been consumed by individuals in the form of
jewelry, especially in India where it is considered
auspicious. Gold is presumed to be a safe haven in
times of economic uncertainty, a fact exemplified
by a 30% increase in the value of gold over the
past year.
India is one of the largest markets for gold,
accounting for approximately 10% of the total
world gold stock as of 2010. Rural India accounts
for 65% of this gold stock. Though gold prices
have increased at more than 19% CAGR from
2002 to 2010, gold stock in India has grown at
22% CAGR during the same period to 18,000
tons (Rs. 32,000 billion) as depicted in Figure
1. The demand for gold has followed a regional
trend with southern India accounting for 40%
of annual demand, followed by the west (25%),
north (20-25%) and east (10-15%).

Value of Gold Stock

(Rs. Bn)
35,000

Organized Gold Loan Market Size

(Rs. Bn)
28%

600

32,000

30,000
25,000

25,000

400

46%

20,000
15,000
10,000

41% 500-530

500
50%

300
CAGR

13%

11,669

200

44%

250

CAGR

37%

6,462

375

120

100

5,000

25
0

0
FY02

FY07

FY09

FY02

FY10

Source: Muthoot Finance, August 2011

Figure 1

Indian households typically have an emotional

attachment and sense of personal belonging to
the gold they own, which is usually in the form of
jewelry, coins or bars. Thus, gold owned by Indian
families is rarely liquidated unless in extreme
financial need consequently, monetary value of
a gold investment is rarely realized. But, pledging
gold ornaments and other gold assets to local
pawnbrokers and money lenders to avail loans
has been prevalent in the Indian society for many
decades, particularly in rural areas. However, over
the past decade, the organized sector banks and
NBFCs have taken the lead. The urban populace
is also beginning to realize the potential value
that can be realized through gold loans, which
has led to rapid growth of the gold loan market
in India.

Looking for Gold in the Indian

Gold Loan Market
Major Players
The key players in the Indian gold loan market
include the unorganized sector, banks public/
private/cooperatives and NBFCs. While the unorganized sector, comprising local pawnbrokers
and moneylenders, has traditionally dominated
the gold loan market for many decades and
still commands nearly 75% of the market, the
organized sector, led by NBFCs, is catching up fast.
The organized sector has grown at a rapid pace of

cognizant 20-20 insights

FY07

FY09

FY10

FY11

Source: Muthoot Finance, August 2011

Figure 2

Share of Organized Market

Players (%)
14.50%

12.10%

18.40%

23.60%

14.80%

13.70%

9.70%
32.20%
11.60%

52.30%

50.60%

46.50%

FY07

FY09

FY10

Public sector banks

Private sector banks

NBFCs

Cooperatives

Source: Muthoot Finance, August 2011

Figure 3

40% CAGR from 2002 to 2010 (see Figure 2) and

is expected to grow by 33% to 41% CAGR in 2011.
And in doing so, these companies are challenging
the dominance of the large unorganized sector.
Within the organized sector, NBFCs have grown at
a rapid rate from 18.4% in FY07 to 32.2% in FY10
as depicted in Figure 3.

Gold Loan Portfolio of Key Market Players (Rs. Bn)

73%

CAGR
80

74%

64%

32%

46%

13%

58%

19%

52%

73

70
60

52

50
40

33

33

30
20

26
14

12

10
0

22
12

39
31
24

17

17
6

Muthoot
France

Manappuram

FY07

FY09

Muthoot
Fincorp

Indian Bank

FY10

Indian
Overseas
Bank

11 9

Federal
Bank

15

11

6
South
Indian
Bank

16

19
4

State Bank
of Travancore

14

Andhra
Bank

Source: Muthoot Finance, August 2011

Figure 4

Figure 4 depicts the gold loan portfolio size for

key organized sector players, again highlighting
the rapidly growing dominance of NBFCs (e.g.,
Muthoot Finance, Manappuram and Muthoot
Fincorp).
Key Features of Gold Loans
The key features of gold loans in the Indian context
are described in Figure 5. With easy disbursals,

few limits on cash usage, high LTVs and flexibility, it is easy to see why gold loans are becoming
more and more popular.
Why NBFCs Are Growing
By virtue of their business model, NBFCs have
grown rapidly over the last few years as evidenced
by their increase in market share. A comparison
of gold loan features across key players is high-

Gold Loan Features

Secured

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.

Low disbursal times

NBFCs and the unorganized 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.

High loan-to-value
(LTV) ratios

While banks would typically not give more than 75% of the gold value as loan, NBFCs
lending could go as high as 95% in case of high-purity gold.

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 about 90 to 100 days.

Varied interest rates

The interest rate depends on the tenure and amount of loan. It varies from 12% to 18%
in the case of banks, while for NBFCs, it could reach 24%. The interest rates charged
by the unorganized segment are much higher and can range from 30% to 50%.
Reasonable rates of interest are especially applied if the loan to value (LTV) does not
exceed 50-60%.

Multiple repayment
options

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, can also be an option.

Figure 5

cognizant 20-20 insights

 Non-bankable customers are also served.

Better operating cost structure vis--vis banks.
Convenient hours of operation.
Flexibility: Provision of very small and very

lighted in Figure 6. The key differentiators for the

NBFCs as compared to the banks and cooperatives are:

Quick

loan approvals and disbursals, with

minimal documentation.

large loan amounts.

Multitude of loan options with higher LTVs.

Greater accessibility due to better penetration.

Feature Comparison of Gold Lender Offerings

Lender Banks/NBFCs

Loan
Feature

Muthoot
Finance

Manappuram

12% to 21%
Rate of
interest (%)

Loan-tovalue ratio
(%)

Avg of 72%,
high of 85%

Up to 85%

Loan tenure

Disbursal
time

Muthoot Fincorp

Indian Bank

13.45% to 24%

12.25% to
15.25%

Up to 90%; 100%
in some cases

Lower of
70% or
value based
on rate per
gram and
net weight

Indian
Overseas
Bank
12% to 12.5%

6 to 36 months

5 mins

5 mins

1,500
Min loan
amount (Rs.)

South Indian
Bank

State Bank of
Travancore

13.5% to
15.75%

13.75%

15.00%

Up to 85%

Avg of 73%
to 76%

Based on rate Based on

per gram and rate per
purity
gram and
purity

6 months
to
12 months

12 months
(max)

6 to 12
months

50,000

No limit

2 million

1 million

7.5 million

Any

Any

Any

Any

Commercial
only

Any

Any

Processing
fee

Rs. 5 to Rs. 75,

based on loan
amount

0.5%
for loans
greater than
Rs. 25,000

Rs. 202 per

lakh; Rs. 300
appraiser
commission

0.25%

Prepayment
penalty
(Rs.)

Only ID at
disbursal

Only ID at
disbursal

Only ID at
disbursal

ID proof
and asset
ownership
documents

Proof of
commercial
activity;
unaudited
balance
sheet for > 3
lakhs; jewel
appraisal
certificate

Asset
ownership
proof
and bank
account

ID proof
and asset
ownership
documents

In-house
evaluation
Schemes
with
different
value per
gram and corresponding
interest rate

Interest to
be paid for
number of
days loan
availed

Part redemption
Part payment
Exclusive
counters for
loans more than
Rs. 25,000
Prompt
payment rebate
of 2%
Minimum 7
days interest is
payable

Documentation

Others
important
features

24 months
(max)

10,000

10 million

Purpose

Andhra
Bank

3 mins to 4 hours
500

10 million
Max loan
amount (Rs.)

Federal
Bank

Minimum
interest is
the lower
of 5 day
interest or
Rs. 50
Schemes
with
different
value per
gram

Figure 6

cognizant 20-20 insights

1 million

Any

Any
Nominal
appraiser
charges

ID proof
and asset
ownership
documents

ID and
residence
proof

Loan Interest Rate Comparison Across Categories

Lender Banks/NBFCs
Loan
Category

Home Loan
Car Loan
Gold Loan
Personal
Loan

Muthoot
Finance

Manappuram

NA

NA

Muthoot
Fincorp
NA

NA

NA

Indian
Overseas
Bank

Federal
Bank

South Indian
Bank

State
Bank of
Travancore

11% to
11.75%

11% to
11.75%

11.03% to
11.53%

13.65% to
14.90%

11.5% to
12.25%

11.75% to
12%

13.25% to
13.75%

12.25% to
13.25%

13.65% to
15.15%

12.5% to
13.25%

13.45% to
24%

12.25% to
15.25%

12% to
12.5%

13.5% to
15.75%

13.75%

15.00%

NA

17.25%

15.75%

17.75% to
20.25%

17.90%

19.25% to
19.75%

NA
12% to
21%

Indian Bank

Figure 7

A comparison of interest rates charged by lenders

across loan categories is shown in Figure 7. The
comparison of interest rates shows that gold
loans fetch banks higher rates as compared to
home loans and car loans. Hence, this category
is being targeted aggressively by banks. However,
NBFCs have a much greater focus on gold loans
and continue to provide attractive loan features
which enable them to charge higher rates,
generate higher profits and grow rapidly in a
singular direction.

Risks to Borrowers and Lenders

Since lenders take possession of the gold assets
in a loan transaction, in case of a theft they may
not have sufficient funds to compensate all the
borrowers for their loss in its entirety. This is more
important for loans placed in the unorganized
sector; banks/NBFCs usually have better security
and insurance coverage. Furthermore, financial
packages cannot compensate for the personal
attachment a borrower has with the gold assets.
Moreover, a sharp decline in gold prices increases
the original LTV. A lender may require an
immediate recovery of any amount that exceeds
the original LTV ratio, but the borrower may be
unable to pay this amount. Restructuring of the
loan may be required in these cases. Additionally, if the value of the pledged asset declines, a
borrower may be more willing to default on the
loan. This poses a serious concentration risk to
the lender, especially to the NBFCs that have a
high exposure to gold loans and lend at high LTV
ratios.

cognizant 20-20 insights

The increase in gold prices over the last few

years, coupled with the surge in gold loan
borrowings during this period, could create a
gold bubble which could burst in the event of a
significant correction in gold prices. Banks/NBFCs
with significant exposure to gold loans could
face widespread defaults, which could adversely
impact the economy.
The organized sector today manages these risks
through various methods such as enhanced
security, insurance cover, buying gold futures, etc.

Regulatory Environment
While there are no means of controlling the unorganized sector, the organized sector of banks and
NBFCs come under the purview of the Reserve
Bank of India (RBI) which has norms to regulate
the gold loan market.
NBFCs had been traditionally disbursing gold
loans through funds received from banks under
priority lending for the agricultural sector. The
loans under this category enjoy an interest
rate discount of approximately 200 bps over
the normal interest rates charged by banks. But
to reduce the risk in the system, the RBI ruled
in February 2011 that bank credit to NBFCs for
lending against gold jewelry will not be treated as
exposure to the agricultural sector. The resulting
higher interest rate for funds is expected to
promote better lending practices by NBFCs to
creditworthy borrowers.
With the continued rapid growth of the gold
loan market in India, RBI has started examining

lenders, especially NBFCs, for possible concentration risks (i.e., risks due to a sharp
decline in the prices of gold for a lender with a
large exposure to gold assets pledged against the
loans).
All lenders are required to adhere to the KYC
norms. NBFCs allegedly have not strictly followed
this regulation and hence
approximately have been under the RBIs
scanner for some time now.

With
65% of the market in
rural areas, firms need
to develop strategies
to target this segment
effectively and provide
better accessibility
to borrowers. When
expanding, firms need
to ensure consonance
of services and
operations throughout
the network.

Currently,
NBFCs
gold
loans are regulated by RBI.
However, some state governments require compliance
with relevant state money
lending statutes. If the state
governments succeed in
enforcing this regulation,
the profit margin of NBFCs
would be further squeezed.

There have been recent

complaints regarding high
interest rates and penalty
rates charged by NBFCs. This
has caught the attention of
regulators; any regulatory move in this regard
would impact the profit margin of NBFCs.

Role of Technology
Information technology has played an increasingly important role in the rapid growth of the gold
loan market.

Technology provides scalability to gold loan

businesses, enabling quick roll-out of branches
and efficient penetration of the underserved
markets.
Provision

of accurate real-time information

has led to faster decision making and reduced
turnaround time for loan disbursals.

Technology

has significantly reduced human

intervention and thereby, the approval,
disbursal and repayment processes have
become much faster, simpler and more robust.
Better adherence to lending regulations (KYC,
priority lending, etc.), consonance in firm-wide
lending activities, efficient tracking of borrower
accounts, process transparency and minimization of operational costs are some of the
major benefits realized through the use of
technology.

cognizant 20-20 insights

Gold loan firms use negligible or small-scale

proprietary IT systems. These are proving to be
inadequate given gold lenders strong growth.
Hence, firms are increasingly looking to leverage
technology for further growth. They are engaging
enterprise solution providers to provide integrated
solutions for loan origination, servicing and collections.

Conclusions
For borrowers, gold loans have emerged as one
of the best means of raising quick, short-term
capital. For lenders, gold loans are more advantageous compared with home and car loans because
of the shorter tenures, lower processing time and
cost, and greater returns due to higher interest
rates. These factors, along with appreciation in
value of gold, have led to an explosion in the gold
loan market. With everyone wanting a piece of this
action, the organized sector is challenging the
large unorganized gold loan market dominated
by pawnbrokers and moneylenders, with NBFCs
leading the pack due to simpler approval and
disbursal processes, flexible products and better
accessibility.
An examination of these trends makes clear that
banks/NBFCs that arent yet into the gold loan
market might find it attractive. This is due to the
following factors:

Better ROI due to lower cost, higher interest

rates and strong collateral.

Ability to compensate for lower off-take of car/

home loans.

Scope

for cross-sell opportunities in future

including other gold-based products.

Opportunity

to capture the growing underserved and under-penetrated market.

With approximately 65% of the market in rural

areas, firms need to develop strategies to target
this segment effectively and provide better accessibility to borrowers. When expanding, firms need
to ensure consonance of services and operations
throughout the network.
Firms need to manage risks related to possible
sharp fall in gold prices and non-adherence of
regulatory norms and also need to ensure that
physical assets are properly valued, stored and
documented. Firms need to invest in technology
to better manage the increasing volumes and to
reduce risks.

Recent Developments and

Future Outlook
To compete with NBFCs, banks have recently
improved/streamlined their loan processes
with some banks purchasing assaying machines
to disburse loans in 15 minutes. This poses a
challenge to the growing dominance of NBFCs in
the gold loan market, more so since banks usually
charge lower rates of interest compared with
NBFCs.
Gold loans are among the newest class of assets
which have seen rapid growth in securitization.
But, with the restriction on agricultural sector
status of gold loans by RBI, the pace of securitization of these loans is slowing down as most of
these securitizations focused on benefits accrued
through the use of agricultural sector status.
Also, RBIs draft securitization guidelines (Sept.
2011) had proposed minimum holding period
(MHP) of 12 months for allowing securitization
transactions. Given the short tenure of gold loans
(a year and lesser), securitization of the same will
not be possible. A new proposal is under consideration to modify the MHP for gold loans to two
months, which would allow securitization of gold
loans. This would further provide liquidity to the
primary market and provide a boost to the overall
gold loan market.
The government views gold loans as an effective
means of meeting the demand for micro-finance
in India. This would encourage framing of policies
favorable to the growth of the gold loan market.
To counter the rise in borrowing costs due to
removal of agricultural sector status on loans

from banks, NBFCs are seeking newer avenues

of borrowing. In addition to using bonds and
commercial papers, NBFCs are attracting huge
private equity investments of late.
Gold loans have become a basis for creation
of new financial products such as loans for
purchase of gold wherein gold is purchased on
the date of the loan and held as a pledge until
the equated monthly installments are paid. Gold
saving schemes are also emerging wherein the
customers pay regular cash flows which on
maturity are added with a certain amount of
interest payment to purchase gold for customers.
With frequent hikes in interest rates by the RBI
and the subsequent hike in rates by banks, the
cost of personal loan borrowing is increasing. This
will lead to an increased consumer willingness to
secure gold loans.
Since more than 75% of the gold loan market is
still with the unorganized segment as of 2010,
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
and the existing size of the gold loan market
(approximately 1.2% of the total gold stock). This
presents a significant scope for growth of the
gold loan market.

References
Muthoot Finance, NCD Prospectus, Aug 2011
India Securitization Summit 2009, White Paper
RBI, Draft Revisions to the Guidelines on Securitization Transactions, Sept. 2011
http://articles.economictimes.indiatimes.com/2011-06-03/personal-finance/29617389_1_gold-loan-goldprices-loan-size
http://www.neytri.com/gold-loans-what-you-must-know/
http://thegoldwatcher.blogspot.com/2011/05/indian-gold-loan-market-expanding.html
http://articles.economictimes.indiatimes.com/2011-09-06/personal-finance/30119263_1_gold-loans-nbfcs-personal-loan
http://www.apnapaisa.com/loan/gold-loan-india/rates.html
http://online.wsj.com/article/SB10001424053111904265504576567780324461332.html
http://www.thehindu.com/business/Economy/article2376650.ece

cognizant 20-20 insights

http://banking.contify.com/story/manappuram-finance-signs-10-yr-multi-million-dollar-deal-with-ibmto-revamp-it-system-2011-07-15
http://www.ibm.com/news/in/en/2011/07/27/o367559z88357v51.html
http://telecomtalk.info/muthoot-fincorp-introduces-mobile-loan-powered-by-atom-technologies/26077/
http://www.muthootfinance.com/services/gold-loan.html
http://www.statebankoftravancore.com/Interest_Rate_Loan.htm
http://www.southindianbank.com/interestRate/interestRateDetails.aspx?irtID=7
http://www.southindianbank.com/interestRate/interestRateDetails.aspx?irtID=8
http://www.iob.in/Rates_at_a_glance.aspx
http://www.iob.in/CCC_jewellery.aspx
http://indian-bank.com/rate_loan_personal_base.php
http://indian-bank.com/rate_loan_agri_base.php
http://www.muthootfincorp.com/faq_goldloan.html
http://www.muthootfincorp.com/faq_smartplus.html
http://www.capitalmarket.com/cmedit/PrintStory.asp?SNO=469165&CoverageID=
http://www.asiantribune.com/news/2011/06/09/sri-lanka-commercial-bank-take-gold-loans-countrywide
http://www.thenational.ae/lifestyle/personal-finance/unlock-the-equity-behind-your-gold
http://www.zerohedge.com/news/russian-central-bank-offer-gold-backed-loans-or-why-spam-standardcoming-end
http://www.thehindubusinessline.com/industry-and-economy/banking/article2711896.ece

About the Authors

Amit Churiwal is a Consultant with Cognizant Business Consulting, where he has worked with the Card
and Payments Practice and is now a part of the Consumer Lending Practice. He can be reached at Amit.
Churiwal@cognizant.com.
Ashish Shreni is the Consumer Lending Practice Head with Cognizant Business Consulting and has worked
for over 12 years in the BFSI space on projects spanning business and IT strategy, business process
optimization and complex project execution. He can be reached at Ashish.Shreni@cognizant.com.

About Cognizant
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Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
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