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By VP Nandakumar
When Manappuram Finance Ltd. first entered the gold loans market in the latter half of the nineties, it also became the first NBFC in India to get into gold loans. Till then, this business was the preserve of the unorganised sector, the pawnbrokers and moneylenders who operated in lanes and by lanes across the country away from the oversight of regulators and policy makers. Indeed, India’s regulatory and policy making establishment (as also decision makers in the banking sector) were largely uninformed about gold loans and why it mattered to so many ordinary Indians. After all, there were no academic papers or studies about the share of gold loans in India’s credit market, and there was little awareness about what made people resort to gold loans. Consequently, in those early days, we found it difficult to convince bankers about the viability of the gold loan business in a corporate setting and getting them to extend loans to us was not easy. Of course, things changed once we had demonstrated by example how a business overlooked by the mainstream financiers could be so relevant to India’s macro economy.
Since those early days, gold loans have come a long way but we continued to face a dearth of verifiable data-backed understanding of gold loan customers. The main reason for the lack of representative information is that the gold loan industry is fragmented and dominated by the unorganised and unregulated lenders like moneylenders and pawnbrokers. To this day, less than a third of the estimated gold loan market in India is conducted via banks, non-banks and other registered entities.
Over these years, we have tried our best to do what we can to rectify the situation. In the year 2009, we commissioned a study through the ICRA Management Consulting Services Limited (IMaCS) which was published with the title “Gold Loans Market in India, 2009” to become the first serious study of the gold loans sector. We followed this up in 2011 with a survey and study of our own gold loan customers conducted by a senior economist affiliated to the University of Kerala, Thiruvananthapuram.
In 2012, when the RBI set up the Rao committee to undertake a thorough analysis of the gold loan business, the committee members expressed their frustration that almost no data or reliable information was available about this age-old business. It was true that most of the existing research was based on anecdotal evidence, without hard numbers to back up the conclusions.
Accordingly, we had forwarded a copy of our 2011 study of our gold loan customers to the RBI. We understand that it was relied upon during committee deliberations, and it helped establish the positive impact of gold loans on the lives of the masses. It became clear to the committee that gold loans were no longer a distress product, having evolved into a lifestyle credit product. Customers were as comfortable monetising their gold jewellery to meet short-term cash flow mismatches as they were in availing a home loan or an auto loan. The view gained ground that if the gold loan sector is not handled with judicious policy initiatives, people may head back to the unorganised sector dealing a body blow to the cause of social and financial inclusion.
The Rao Committee report on India’s Gold Loans sector commissioned by the RBI came out in 2013. Since then, IMaCS has been putting out periodic updates to its original 2009 study. However, there is a perceptible lack of updated studies focused on the gold loan customer. As things stand, much of our understanding of the typical borrower's profile, requirements etc. is based on our own experience gathered over the years. This has a weakness in that bias can creep in, and one’s presumptions can continue to drive the business unmindful of the reality of an ever-changing socio-economic backdrop. After all, customer preferences change, their requirements change, competitive landscapes change and, most importantly, people change!
A new study in collaboration with the Gokhale Institute, Pune
It is, therefore, of utmost importance to update our understanding of the market, customers, competing products, and the wider socio-economic dynamics. Several studies and reports are available for most of the micro-markets and credit segments, but rarely do we come across a serious, painstaking study about the business of lending against household gold jewellery.
That’s why in late 2019, Manappuram engaged the Gokhale Institute of Politics and Economics (Pune), a renowned economic research institution, to conduct a fresh study of its gold loan customers. Established in 1930, the Gokhale Institute is the oldest economic research and training institute in India. It is reputed for its initiatives in qualitative research in diverse areas of economic theory and practice. Its founding director, Shri D.R. Gadgil was a member of the first National Income Committee and the Deputy Chairman of the Planning Commission, the highest bureaucratic position in the Indian economic sector with the rank of a cabinet minister. He is well known as the author of the Gadgil formula which served as the basis for allocation of central assistance to states during the fourth and fifth Five Year Plans.
The Institute is credited with pioneering contributions by way of surveys, research, informed debate, analyses and critiques, which have shaped the public discourse on major socio-economic initiatives. It developed a methodology for data collection which is still used by National Sample Survey Organisation (NSSO). On the policy front, the institute designed the institutional framework for NABARD, formulated the Employment Guarantee Scheme and Agricultural Insurance Scheme. It is indeed an honour for Manappuram to be associated with the Gokhale Institute for such an important study.
However, no sooner had the spadework for the study commenced that the world was struck by the Covid-19 pandemic. We realised that this event had the potential to alter the course of the future. The customer’s behaviour, perspectives, and preferences related to gold and other credit products must be reassessed. The exercise required undertaking a baseline survey of, and data collection from, gold loan customers. While any researcher would have preferred to have a broad sample for collecting a representative dataset, we had to restrict the data collection to our own customer base on account of customer confidentiality. The fact is, other gold loan lenders would not be comfortable in sharing their customer information with external researchers.
The larger purpose of the study was to analyse customer behaviour (using actual transaction data) to make actionable policy recommendations. For this, the study needed to understand the service delivery process, the benefits accruing from gold loan availability, as well as the costs of non-availability. Afterall, unless we understand how customers are likely to behave in the absence of the institutional gold loan, we may miss out on the prospective policy changes required to shift the bulk of the unbanked and underbanked to the institutionalised lending framework.
Finetuning the methodology
Much of the secondary information concerning the gold loan industry is based on small and fragmented data points. Manappuram has over 25 lakh active customers and a network of nearly 3,500 gold loan branches spread across 28 states/UTs of the country. The target sample was designed using a stratified sampling method for a representative sample and to arrive at an unbiased understanding of the gold loan customers at the national level.
We conducted a few pilot sample surveys to fine-tune the questionnaire to make it easier to grasp and derive appropriate responses. As the survey was to be conducted over telephone, it had to be short, yet detailed enough to draw a relevant response. The questionnaire focused on the customer’s experience with gold loans and other loans, experience with institutional (Banks/ NBFC etc.) and non-institutional lenders (moneylenders/ pawnbrokers etc.), their perspective on satisfaction derived from the gold loan, benefits and costs associated with availability and non-availability of gold loan, the changes they desired in the product design, and their preferences regarding ease, cost, tenure etc.
As the survey was conducted across India with most respondents belonging to the bottom of the pyramid, we conducted all interactions in their regional language using translated survey questionnaires. We faced many connectivity challenges, often requiring repeated calling to complete all the questions in the survey. The questionnaire took approximately 15 minutes to administer. We managed to generate responses from 3,582 customers who completed the telephonic survey (partial responses were not considered in the study for uniformity). The respondents belonged to 357 districts of 27 states and union territories, giving us a representative all-India sample for better understanding of the role played by gold loans in fulfilling the objectives of responsible lending, including the economic, social, and governance (ESG) agenda of our institutional lenders.
Summing up
To summarise, a survey study of gold loan customers across India was conducted in early 2020 by the Gokhale Institute of Political Economy, Pune. The study utilised the customer base of Manappuram for collecting borrower responses to the survey questionnaire and the same was matched with their transaction data to undertake a comprehensive analysis of observed customer behaviour.
The objective of the survey study was to understand the behavioural and economic aspects of the customers, the purpose and tenure of these borrowings, the factors influencing the decision from where to borrow (banks, non-banks or unorganised), why customers rely on gold loan (cost-benefit vs other alternatives available to them), and the effects of its availability on their lives. In comparison to a survey-only method, this approach of combining it with actual transaction data offers a unique validation of the responses, providing us with a holistic view of the role played by gold loans in their day to day lives.
We aim to publish the detailed survey report, its findings, and recommendations (for the lending institutions, regulators and policy makers) in due course. I intend to write more about it once the report is published.
Published in Unique Times Magazine, May 2021
(Shri V.P. Nandakumar is MD & CEO of Manappuram Finance Ltd. Views are personal.)