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It is the NBFCs that have paved the way for institutional lenders to grow in this segment. But the job is still not done, and policy support is needed to draw more poor borrowers away from exploitative pawnbrokers into formalized lending
After the economic havoc wrought by two waves of the pandemic, India’s news media have carried many stories about how people in distress are pledging their gold jewellery to make ends meet. There was one report published by a leading national daily that particularly caught my eye. It was titled “As lockdown eases, demand for gold loans expected to surge in Tamil Nadu," and it talked about a woman named Rajalakshmi who, prior to the pandemic, had worked as a domestic help in two houses in Chennai. She then lost her job as people became averse to housemaids or outsiders entering their homes. Her husband who worked as a cook in a small restaurant also met the same fate. As her daughter’s school and her son’s college fees were due, and her savings were not enough, she ended up pledging five sovereigns of her gold which she had saved over the last four years.
Here comes the part that literally made me sit up. For her gold loan, Rajalakshmi went not to one of the well-known gold loan focused non-banking financial companies (NBFCs), but to a public sector bank. The manager of the bank who also featured in the story was quoted as saying that during pre-covid times the bank had 5-7 people walking in every month to pledge gold, but now almost everyday customers were coming in to ask for gold loans. Clearly, the gold loan business at the bank was doing very well.
The rise of banks in gold loans: According to the Reserve Bank of India’s (RBIs) latest monthly data on sectoral deployment of bank credit, the outstanding gold loans given by banks stood at ₹62,221 crore as of 30 June 2021 compared to ₹34,267 crore a year ago, that is a jump of over 80% in just one year. (In June 2019, it stood at ₹25,405 crore.) These figures speak for themselves and there’s no denying that over the past 3 to 4 years, the banking sector has emerged as a force to reckon with in gold loans. Should this worry the gold loan focused NBFCs? Not at all. In fact, as the head of one such NBFC myself, we welcome the rise of banks in gold loans, believing strongly that their path was actually paved by the gold loan NBFCs. How it came to pass is a story worth telling.