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Tuesday, December 16, 2008

Loan against gold Versus a personal loan?

India's fascination with gold is well known and widely documented. We continue to stock up gold in physical and demat form in spite of the steady increase in prices over the last 12 months.

For purely cultural, emotional and safety reasons, gold today has become an integral investment/savings option and is a part of every savvy investor's 'asset allocation'.

A look at some eye-opening statistics will reveal the current market scenario. India consumes approximately 800 tonnes of gold per annum (inclusive of bars, coins, jewellery), with an estimated gold holding of close to 13,000 tonnes as on March 2007. With 95% of this holding in individual hands, this translates to a market value of Rs 15.60 lakh crore.

Gold is unique in its ability to find consumers in every customer segment and is the only investment/ savings option that cuts across caste, class and region— it also bridges the rural/ urban divide.

If one were to sample 10 people from a middle-class background in the country at random and conduct a poll on their investment holdings, it would not be unrealistic to expect eight-nine out of this group to have invested in gold, five-seven to hold NSC/KVP or insurance policies and four-seven to have self-owned property.

Barely one-two would have actually invested in equity or in mutual funds. Among rural areas or lower income groups as well, the percentage of people holding gold, albeit in smaller quantities, would be similar. While the reasons for accumulation of gold may vary across these customer segments, gold is arguably the asset most widely held by Indians.

It is thus ironic that the most widely held asset also happens to be the least productive and most illiquid as well, with most of us actually ending up paying money to keep the investment safe and secure. Personal/cash loans or home loans/loan against insurance policy are still in vogue as compared to loan against gold jewellery.

In the current macro-economic environment, where credit norms are being tightened and liquidity is scarce and as availing of loans becomes tougher across customer segments, leveraging secured assets such as gold/NSC/KVP/insurance policies, will certainly emerge as the best possible options from the borrower as well as lender’s perspective.

Loan against gold jewellery has traditionally been the domain of the unorganised sector, with either the local moneylender or the jeweller himself stepping in to fund those customers (especially in rural and semi-urban markets). Banks are relatively new entrants in this segment, though there are several NBFCs that have been fairly active in this space for a long time.

So if the penetration of loan against gold jewellery is so low, why has it not been addressed yet? In my view, the key reasons for this are — social stigma, lack of awareness, and lack of trust. Some of the customer segments that can be identified are:

Urban salaried & self-employed: With loan disbursal in 60 minutes at the closest branch and minimal documentation, loan against gold jewellery is a convenient option for this segment of customers. Further, only interest is payable on the loan amount, as against an EMI on other loan types, hence net outflow is much lower than in the case of an EMI-based loan.

Customers with low/under stated income: Assessment of income through IT returns or salary slips and cash flows to repay are two of the most important determinants for credit underwriting by any financial institution. There is, however, still a large section of customers that draws cash salaries or has very low incomes. Hence, they are either not eligible or get a lower amount than they require, because of the income stated on paper. For these customers, the secured loan option offers an alternate means of encashing the investments.

Customers in rural/ lower socio-economic strata of the society: Organised credit has been largely focused on urban India and largely been dominated by personal installment loans. Distribution of outstanding credit among banks indicates that while the share of personal loans has grown from 11.2% in 2000 to 22% in 2007, share of agricultural credit has grown only marginally from 9.9% in 2000 to 11.8% in 2007.

Further, among banks, RBI data shows that the share of rural/semi urban areas in total credit outstanding among banks has dropped from 28% to 23% between 1997 and 2007. Loan against gold jewellery/NSC/KVP/insurance will, therefore, provide an opportunity for financial inclusion.

Loan against gold and securities is offered either as a term loan or as an overdraft facility based on customer requirement. Options are also available under various forms of gold be it physical, gold ETFs or SBI gold certificates.

In a typical loan against gold transaction, only regular payment of interest during the tenure of the loan is required with the principal amount being repaid at the end of the tenure. This allows customers to manage their cash flows better on a monthly basis, and use one-time or lump-sum payments to repay the principal amount. Further, no other loan type offers funding faster than loan against gold.

Finally, given the emotional attachment to gold, the probability that the entire family is involved in the decision to borrow using this option makes them morally responsible to repay as well.

To sum up, the organised banking sector can use loan against gold/securities to bring customers, who were earlier excluded from their consideration set, into the mainstream banking as the sector itself broadens its reach in semi-urban/ rural areas. With customers, too, getting rid of their inhibitions and realising that this is a logical and smart borrowing option, loan against gold/ securities would appear to be at a strategic inflection point and is well poised for accelerated growth in India.

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