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The gold loan sector has been at the forefront of the Indian government’s effort to bring more people into the ambit of formal finance. Besides, the industry also contributes to the monetisation of India’s vast stock of private gold through the credit route. The gold loan is typically a small ticket loan, often given to customers in a rural or semi-urban area, against their household jewellery. These loans are taken by people who don’t have access to any other form of formal credit. At Manappuram Finance Limited, for instance, almost two-thirds of our loans against gold are microloans of amounts less than Rs 50,000.
And yet, even as India sits atop the largest stockpile of privately held gold in the world, there are some roadblocks which prevent the industry from contributing its full might to the economy. What should the government and the regulators do to ease the way? Here are a couple of suggestions which can be considered in the forthcoming budget.
Introduction of risk weights based mechanism to replace the LTV cap
At present, the Gold loan companies can lend only up to 75 percent of the value of Gold in jewellery. To a borrower holding a meagre quantity of gold, a cap on the maximum loan he can avail is counterproductive. It also goes against the government’s stated mission of furthering financial inclusion. The unorganised sector, which faces no such restriction, is winning back marginal borrowers with the promise of higher loan to value (LTV).