The Social Relevance of Gold Loans
V.P. Nandakumar, MD & CEO.
In recent months, there’s been a spate of media articles focussed on the success enjoyed by the leading players in the gold loan segment (incidentally, one of India’s fastest growing businesses), and how more and more people are shedding age-old taboos to borrow money against their gold jewellery. While this traditional business of lending money against gold was professionalized and scaled-up in recent years by Kerala-based NBFCs, all the major national banks have now jumped into the fray with enthusiasm. Moreover, the media attention is not restricted to India alone. Both the New York Times (“Out from India’s alleys, gold loans gain respect,” September 28, 2009) and the Washington Post (“In India, gold loans gain popularity as precious metal's prices soar,” January 12, 2010) recently carried stories about the growing popularity of gold loans in India.
It is therefore an apt moment to acquaint the reader with an insider’s perspective on why gold loans matter and why they hold so much promise for our country’s future.
Gold and domestic savings
In India the savings habits of the poor and lower classes differ significantly from the richer sections. While the rich invest their savings across many different kinds of assets, the poor continue to invest their savings mainly in gold. In fact, in rural areas, this is often a necessity because of lack of access to banks. Also, there are strong cultural factors at work in India which make gold not only a desirable but also a necessary asset to hold. Gold is traditionally a store of value, protecting our savings from inflationary devaluation. It also serves important ceremonial purposes, such as in a wedding celebration where gold is always the preferred gift. With increasing prosperity and sophistication, the relative importance of gold to the well-off may have declined, but among the poor it continues to rule.
People in a rural, agrarian society will necessarily face the problem of fluctuating or unsteady incomes. The bulk of their earnings come in the two harvest seasons and the rest of the year can be difficult. It is no surprise that they frequently resort to borrowing money. Quite often, this involves a trip to the local money lender. The money lender is willing to oblige but the interest rates are sky-high which makes repayment a big concern. Loans go into a cycle of defaults and rollovers at ever higher rates of interest and, occasionally, the money lender ends up with the title to the property of the borrowers.
This is the classic debt-trap and a root cause of so much distress among the rural poor.
The road ahead
There is now increasing recognition that economic and social policies need to be rooted in reality, not in any visions of an ideal world. Today, the ground realities are that significant sections of the rural poor continue to lack access to banks, either to park their savings in, or as a fallback for loans in times of need. Also, given the country’s atypical cultural context, gold continues to play an important part in our lives, reflected in the fact that India is consistently the world’s largest consumer of gold. Under these circumstances, the organised gold loan segment is potentially a vehicle for social transformation. Considering that 65 percent of our massive private stock of gold is held by rural households, and that 75 percent of the gold loan market continues to be with the unorganised sector (local moneylenders and pawnbrokers), this is a market with tremendous potential for growth.
At the same time, there is an urgent need for the government and the regulators to recognise the professionalism and transparency that the organised sector brings to this field and encourage its growth. We need a radical shift in the regulatory approach, from one of tolerance with a multiplicity of hurdles, to that of facilitation and active promotion. A useful beginning can be made by not treating this sector on a par with local moneylenders and pawnbrokers. And, it will help if gold loans are not clubbed with other NBFC lending when prescribing regulatory capital.
The distress faced by India’s farmers in recent years highlights the need to move on multiple fronts in extending timely credit to the rural masses. Gold loans must be made a part of this process.
Note: An edited version of this article was published in the op-ed page of The Economic Times dated July 29, 2010 under the title “Gold Loans aid financial inclusion”.