INTRO

Loans form not just an important source of revenue for banks and other financial
institutions, they also add to the economy. The most recent of them being is Gold
loans. Gold loans are amongst the newest class of assets which have seen rapid
growth in securitisation. Gold loans have tremendous prospects for India, which
is the largest user of gold since it can easily be used as the most liquid asset and
hence facilitates transaction. It can thus be put to more beneficial purposes.

1ST POINT
The act of giving loan implies the act of giving money, property or other material
goods to another in
exchange for future repayment of the principal along with the interest or such
other finance charges as
may have been specified, that acts as an incentive for the lender to engage in the
loan1. In the case of a
standardized loan, the terms are formally laid down in writing before the
exchange takes place. Where
a lender requires the pledging of collateral, the same is specified in the
agreement. Most loans have
legal stipulations regarding the maximum interest that can be charged. Also the
covenant mentions the
length of time before which repayment is required. A loan may be for a specific,
one-time amount or
can be available as open-ended credit up to a specified ceiling amount. They
proceed from individuals,
corporations, financial institutions and government.
Loans are a boon to the economy. They result in the growth in the overall money
supply in the
economy, increase competition, introduce a floodgate of start-ups and help in
business expansion.
Loans are the primary source of revenue for financial institutions like banks and
individuals whose
business operates on extending credit facilities.

2ND POINT
Gold has long been a valued commodity, particularly in India where it is
considered auspicious, and has been in use for centuries in the form of jewellery,
coins and other assets. Though gold is a highly liquid asset, it wasnt until
recently that consumers leveraged it effectively to meet their liquidity needs. The
urban populace is now beginning to realize the potential value that can be
realized through gold loans, which has led to rapid growth of the gold loan
market in India2.

Definition and Purposes

Gold loans are secured loans where the person seeking to borrow has to pledge
gold ornaments, gold
coins, gold bullions or other gold assets as security. The assets are often tested for
their purity and on
the basis of such examination the loan is provided. The gold, which usually lies
idle and earns no
money, is utilized towards obtaining loans for other material products.
Gold loans are obtained through banks or other Non-banking financial
institutions that specialize in
such loans. Usually 80% of the total market reigning value of the gold is
provided7. At the end of the
payment of the principal amount along with the necessary interest, the borrower
is allowed to recover
his assets in the same state and same weight.
The only caveat to such loan is that the consumer must be sure of his ability to
repay the loan, or else
the lender obtains a legal possession over the same.
Gold has a huge advantage over other such assets. It has been considered
amongst the most liquid asset
in the world. Also it is universally accepted as a mode of exchange. India is one
of the largest markets
for gold accounting for almost 10% of the worlds total gold stock in 2010.While
pawnbrokers and
moneylenders have dominated the market traditionally and still command close
to 75% of the market,
the modern financial institutions are catching up fast. The organized gold market
has witnessed a surge

FEATURES
Secured Loan is borrowed against the
gold deposited by the
applicant.
Multi-purpose
Low disbursal times
High loan-to-value (LTV) While banks would typically
ratios
Shorter loan tenures
Varied interest rates
Multiple repayment options
The loan can be used for any
purpose, as long as it is not
for any illegal activity or
speculation in the stock
market. NBFCs place even
fewer restrictions on the use
of loan.
NBFCs and the unorganized
sector disburse loans at a
much faster pace (as low as
three minutes to a few hours)
as compared with banks
which may take a few days.
not give more than 75% of the
gold value as loan, NBFCs
lending could go as high as
95% in case of high-purity
gold.
There is no minimum period
for the loan and, if need be,
one can return the loan
amount the very next day. The
average tenure of the loan is
about 90 to 100 days.
The interest rate depends on
the tenure and amount of loan.
It varies from 12% to 18% in
the case of banks, while for
NBFCs, it could reach 24%.
The interest rates charged by
the unorganized segment are
much higher and can range
from 30% to 50%. Reasonable
rates of interest are especially
applied if the loan to value
(LTV) does not exceed 50-
60%.
Repayment can be structured
 as just interest amount with
principal being repaid at the
end of the period in one lump
sum. Repayment through
EMI, covering interest as well
as principal, can also be an
option.

Advantages of a Gold Loan

Available To A Larger Number Of People To avail a gold loan, applicants are usually not required to
furnish any documentation like salary slips, certificates, credit history, bank statements, etc. Due to this
reason, even non-working or unemployed individuals can apply and avail a loan against gold. Some banks or
lenders may however require gold loan applicants to furnish a proof of ownership of the gold ornaments which
theyre pledging.
No Extensive Documentation Required Unlike other types of unsecured loans, a loan against gold
does not require you to furnish extensive documentation for application. You will only be asked to provide
basic documents for proof of identity and proof of residence to avail a gold loan.
Comparatively Lower Interest Rates One of the most important advantages of a gold loan is the
lower interest rate it is available at. While other types of loans like personal loans are normally available at
interest rates ranging between 15% to 26%, a loan taken against gold, i=on the other hand, can be availed at
a significantly lower interest rate ranging between 12% to 16%.
Simpler Alternative To A Personal Loan A loan against gold or a gold loan is a fairly simpler
alternative to taking a personal loan, especially in terms of documentation. For a gold loan, you only need to
take your gold jewellery to the bank or lender, where it will be verified and valued, before the loan amount is
sanctioned to you. With a gold loan, you can expect to get a loan amount which could be as high as up to 80%
of the market value of the gold.
Repayment Options Banks and lenders usually provide flexible repayments terms for loans taken
against gold. Borrower will be given an option to pay only interest during the entire term and at the end of the
tenure you can pay complete borrowed amount in single shot.
Quick Loan Processing & Loan Disbursal Unlike other types of loans which usually have longer
waiting periods between loan application and loan disbursal, loans against gold have a comparatively lesser
wait period. In most cases, banks and lenders will approve and disburse the loan within a few hours or sooner,
once the gold ornaments have been verified and undergone valuation for weight and purity. If you are looking
to get a loan in the minimum possible time, a gold loan may be your best bet.

Gold Loan Market in India

With the rising demand, people also buying gold as the value of gold assets is
rising continuously. On this solid base, the gold loan industry has huge potential
to grow even further as currently it is estimated that less than 2% of the total gold
stock is used for pledging/ obtaining gold loans.
Gold loan business has existed in society since earlier times but the market was
totally unorganized as there was no involvement of government or private
institutions. With the entry of organized players like banks and non-banking
finance companies (NBFCs), the market scenario has changed significantly and
organized players grew rapidly. However, even today, there is a dominance of the
unorganized sector which accounts for nearly three-fourth of the total gold loan
market in the country.
India has the largest gold stock in the world, i.e. more than 18,000 Metric Tons of
gold held by the Indian households. The country accounts for approximately 10%
of the total world gold stock in 20101. This makes the country, one of the largest
gold markets and the demand for gold is rising continuously. The cumulative
annual demand for gold in India will increase from the present level of 1,000
Metric Tons to more than 1,200 Metric Tons by 20202.
Rural India is having the major chunk of this gold and account for around 65% of
the total gold stock in the country. Regionally, the demand for gold varies with
highest demand in the Southern India, followed by West, North and East3.
Similarly, the regional distribution of gold loan portfolio displays almost the
same pattern with southern India recording the highest share in gold loan market.
Indian households have an emotional attachment to family gold, be it in the form
of jewellery, coins or bars. The gold owned by them is liquidated only in
conditions of extreme financial need.
Pledging of gold coins, jewellery etc to local pawnbrokers and money lenders has
been prevalent in India from times immemorial. This is more prevalent in rural
India as they account for the major chunk of gold stock in the country.
Pawnbrokers and money lenders provide the money by securing gold assets as
collateral.
In earlier times, most of the gold loans were provided by the unorganized players
like local pawnbrokers and money lenders. Over the past decade, the scenario has
changed with the entry of banks and NBFCs i.e. organized players, who have
started issuing loans against gold. However, these gold financing companies are
largely providing services in the urban areas. The urban population has realized
the potential of gold and has started using the same to meet their liquidity needs.
This has led to the growth in the organized gold financing market.
In addition, there is a huge potential for growth as only 1.3% of the total gold
stock in India is used for gold loans. Due to high stocks, the rural market is the
high potential area and firms need to develop strategies to develop this segment
effectively and provide better accessibility to borrowers.
The key players in the gold finance industry in India include the organized sector
(i.e. banks-public/private/co-operatives and NBFCs) and the unorganized sector,
comprising local pawnbrokers and moneylenders who have traditionally
dominated the gold loan market for many decades, and who still command more
than two-third of the market. The organized gold loan market stood at INR 510
Billion in FY 2011 and is expected to grow at a CAGR of around 25.5% during
FY 2012-2015 to reach INR 1,285 Billion by the end of FY 2015.
Besides this, gold loans gave rise to new financial products such as loans for
purchase of gold, wherein gold is purchased on the date of the loan and held as a
pledge until the equated monthly instalments are paid. Gold savings schemes are
also emerging, wherein the customers pay regular cash flows which on maturity
are added with a certain amount of interest payment to purchase gold for
customers.

ORGANIZED UNORGANIZED

The gold loan market in India is broadly classified into two categories, namely,
organised sector and unorganised Sector. Organised sector primarily constitutes
of formal institutions such as banks and NBFCs; unorganised sector includes
informal institutions such as private money lenders and pawnbrokers. However,
the market share between
the unorganised and the organised sector is extremely skewed; approximately 75
per cent is in the unorganised market (money lenders and pawnbrokers), and the
remaining 25 per cent in the organised market (specialised NBFCs and
commercial/ cooperative banks). The value of the organised gold loan market in
India is estimated at ` 400-450 billion, with a CAGR of approximately 40 per
cent during FY02-FY10.

Overview of Gold loan provided by Banks and NBFCs

Indias top Banks are now vying for market share in the gold loan business,
which has so far
remained the forte of NBFCs and few Banks in the south. At a time when credit
demand has been
dwindling because of high Interest rates, Banks have stepped up lending against
the yellow metal.
Financing against gold being a secured form of lending, and higher margins are
the key reasons why
Banks are expanding this portfolio. Indias organized gold loan industry has
grown rapidly in the last
two decades. However, during FY 2012-13, the sector ran into strong headwinds
with the RBIs
intervention in March 2012 that effectively altered the rules of the game
overnight. A cap of 60 percent
on the LTV for gold loans given by NBFCs was imposed by the RBI citing
increased concentration
risks.

About Muthoot Finance:

ABSTRACT
Incorporated more than 125 years ago, Muthoot Group today touches the lives of
people in more ways than one. The enterprise is expanding ambitiously and is
aligning business priorities with social responsibility. Muthoot Finance holds the
largest gold loan portfolio in the world. By making the gold loan available easily
at the lowest interest rates, easy documentation processes and repayment options,
enable people to meet their fund requirements even in times of exigency. It
provides personal and business loans (secured by gold jewellery) primarily to
individuals who have no access to formal credit for a reasonable tenure to meet
their short-term working capital requirements.

The origins of Muthoot Finance can be traced back to 1939 when M.George
Muthoot ventured into financial services through a partnership firm under the
name of Muthoot M. George & Brothers (MMG). MMG was a Chit Fund based
out of Kozhencherry. In 1971, the firm was renamed as Muthoot Bankers, and
had begun to finance loans using gold jewellery as collateral. The operations of
Muthoot Bankers was then renamed and incorporated as Muthoot Finance in
2001. Muthoot Finance falls under the category of Systematically Important Non
Banking Financial Company (NBFCs) of the RBI guidelines. The company has
more than 3,510 branches spread across 23 states of the country and is the largest
gold loan company in India. Muthoot Finance, according to the IMaCS Research
& Analytics Industry Reports [Gold Loans Market in India, 2009 (IMaCS
Industry Report 2009) and the 2010 update to the IMaCS IndustryReport 2009
(IMaCS Industry Report (2010 Update))], is the largest Gold Loan NBFC and
has the largest network of branches for a Gold Loan NBFC in India. Muthoot
Finance is also the highest credit rated Gold Loan Company in India, with a
credit rating of AA- (CRISIL) and LAA-(ICRA).

MANNAPPURAM

Our base rate of interest is 14 percent. However, depending upon how high the
loan to value (LTV) is, additional interest (amounting to risk premium) ranging
from 3-12 percent is charged over and above the base rate. The interest and risk
premium is applicable only for the days the money was actually utilised. There
are no prepayment penalties.
 Monthly compounding interest is charged, which the borrower has to pay at the
specified periodicity or at the closure of loan, whichever is earlier. The interest
rate is fixed and calculated on a reducing balance basis.

Features of Manappuram Gold Loan

High Loan Amounts With the Manappuram Gold Loan, you can avail
high loan amounts based on the net weight and purity of the gold ornaments or
jewellery which is being pledged. You can avail loans up to amounts as high as
Rs 1 crore to take care of all kinds of personal financial needs.
Availability of Instant Cash With the Manappuram Gold Loan, you need
not wait to have access to the cash you need. You will be allowed to draw cash
immediately after pledging your gold jewellery or ornaments.
Multiple Schemes to Choose from Manappuram Finance Limited
understands that financial needs differ from individual to individual. This is
why you have a range of gold loan schemes to choose from and select the one
which best addresses your financial and budgetary requirements.
Loan Sanctioned With Minimum Requirements Unlike other kinds of
loan products which require you to furnish a variety of documents and proofs,
the Manappuram Gold Loan can be availed with minimum documentation. You
only need to submit one recent ID, like your Voter ID, Ration Card, Driving
License, Passport, etc.
Quick Loan Processing You neednt wait for days and weeks to get your
loan sanctioned. This loan does not involve any exhaustive or time consuming
formalities, hence saving precious time. Once you have submitted your
documents and application form, your loan may be approved in a matter of a
few minutes, assuming all formalities are complete and in order.
Low Interest Rates One of the primary reasons why the Manappuram
Gold Loan is preferred over other types of loans, is due to the low interest rates
it offers. Also, you only have to pay interest for the exact period of the loan and
for the exact number of days.
No Prepayment Penalty In case you do decide to prepay your loan
before its due date, you may easily do so without having to pay any pre-
payment penalty.

Manappuram Gold Loan Interest Rates

Manappuram Finance Limited offers gold loans at very attractive rates of

interest, making them highly affordable. The base rate for gold loans has been
fixed at 12 %. In addition to the base rate, an additional interest (amounting to
risk premium) ranging between 3% to 12%, will be charged, based on how high
the Loan to Value (LTV) is. The interest payable and the risk premium will only
be calculated for the number of days for which the loan amount has been utilized.
The rate of interest is fixed and will be calculated on a reducing balance basis.
Also, simple interest will be charged on this loan which must be paid by the
borrower at specified periods or at the time of loan closing, whichever occur
earlier.

COMPARISON OF INTEREST RATES

A comparison of interest rates charged by lenders across loan categories is shown

in Figure 7. The comparison of interest rates shows that gold loans fetch banks
higher rates as compared to home loans and car loans. Hence, this category is
being targeted aggressively by banks. However, NBFCs have a much greater
focus on gold loans and continue to provide attractive loan features which enable
them to charge higher rates, generate higher profits and grow rapidly in a singular
direction.

Recent Developments and Future of Gold Loans

To compete with NBFCs, banks have recently improved/streamlined their loan
processes with some
banks purchasing assaying machines to disburse loans in 15 minutes. This poses
a challenge to the
growing dominance of NBFCs in the gold loan market, more so since banks
usually charge lower rates
of interest compared with NBFCs.
The government considers gold loans as an effective means of meeting the
demand for micro-finance
in India. This would encourage framing of policies favourable to the growth of
the gold loan market.
Gold saving schemes have also emerged wherein the customers pay regular cash
flows which on
maturity are added with a certain amount of interest payment to purchase gold for
customers.
With frequent hikes in interest rates by the RBI and the subsequent hike in rates
by banks, the cost of
personal loan borrowing is increasing. This will lead to an increased consumer
willingness to secure

gold loans.

Since more than 75% of the gold loan market is still with the unorganized
segment as of 2010, the
organized segment has a huge potential for growth through larger penetration,
extensive networks and
more efficient branches.
The existing size of the gold loan market is approximately 1.2% of the total gold
stock available.
Hence there is a significant scope for further growth of the gold loan lending
sector. India is one of the
largest markets for gold accounting for ~10% (18,000- 20,000 tons) of the global
gold stock. Rural
India is estimated to hold around 65% of this. Shaped by sentimental and
structural factors, countrys
demand for gold has been buoyant defying the phenomenal rally in price. It is
estimated that ~10% of
countrys gold stock has been pledged, of which, ~75% is in the unorganized
market (money lenders,
pawn brokers, etc) and balance ~25% in organized market (specialized NBFCs,
other NBFCs,

commercial/cooperative banks, etc)10.

Recent Developments and Future Outlook

To compete with NBFCs, banks have recently improved/streamlined their loan
processes with some banks purchasing assaying machines to disburse loans in
15 minutes. This poses a challenge to the growing dominance of NBFCs in the
gold loan market, more so since banks usually charge lower rates of interest
compared with NBFCs.
Gold loans are among the newest class of assets which have seen rapid growth in
securitization. But, with the restriction on agricultural sector status of gold loans
by RBI, the pace of securitization of these loans is slowing down as most of these
securitizations focused on benefits accrued through the use of agricultural sector
status. Also, RBIs draft securitization guidelines (Sept. 2011) had proposed
minimum holding period (MHP) of 12 months for allowing securitization
transactions. Given the short tenure of gold loans (a year and lesser),
securitization of the same will not be possible. A new proposal is under consid-
eration to modify the MHP for gold loans to two months, which would allow
securitization of gold loans. This would further provide liquidity to the primary
market and provide a boost to the overall gold loan market.
The government views gold loans as an effective means of meeting the demand
for micro-finance in India. This would encourage framing of policies favorable to
the growth of the gold loan market.

To counter the rise in borrowing costs due to removal of agricultural sector status
on loans

Conclusion
For borrowers, gold loans have emerged as one of the best means of raising
quick, short-term capital. Gold loans were preferred over conventional personal
loans due to less procedures, fast disbursement and easy instalments. The study
shows that the respondents preferred gold loans from the banks, and most of the
respondents use the fund for their consumption smoothing.
CONCLUSION
For borrowers, gold loans have emerged as one of the best means of raising
quick, short-term capital.
For lenders, gold loans are more advantageous compared with home and car
loans because of the
shorter tenures, lower processing time and cost, and greater returns due to higher
interest rates. These
factors, along with appreciation in value of gold, have led to an explosion in the
gold loan market. The
organized sector is challenging the large unorganized gold loan market
dominated by pawnbrokers and
moneylenders, with NBFCs leading the pack due to simpler approval and
disbursal processes, flexible
products and better accessibility.
Further expansion in the organized sector is required. When expanding, firms
need to ensure
consonance of services and operations throughout the network. Also efficient
tracking of borrower
accounts, process transparency and minimization of operational costs are
essential.
Firms need to manage risks related to possible sharp fall in gold prices and non-
adherence of
regulatory norms and also need to ensure that physical assets are properly valued,
stored and
documented. Firms need to invest in technology to better manage the increasing
volumes and to reduce
risks. Provision of accurate real-time information will lead to faster decision
making and reduced
turnaround time for loan disbursals.

Conclusions
For borrowers, gold loans have emerged as one of the best means of raising
quick, short-term capital. For lenders, gold loans are more advantageous
compared with home and car loans because of the shorter tenures, lower
processing time and cost, and greater returns due to higher interest rates. These
factors, along with appreciation in value of gold, have led to an explosion in the
gold loan market. With everyone wanting a piece of this action, the organized
sector is challenging the large unorganized gold loan market dominated by
pawnbrokers and moneylenders, with NBFCs leading the pack due to simpler
approval and disbursal processes, flexible products and better accessibility.
An examination of these trends makes clear that banks/NBFCs that arent yet into
the gold loan market might find it attractive. This is due to the following factors:
1 Better ROI due to lower cost, higher interest rates and strong collateral.
2 Ability to compensate for lower off-take of car/ home loans.
3 Scope for cross-sell opportunities in future including other gold-based
products.
4 Opportunity to capture the growing under-served and under-penetrated
market.

With approximately 65% of the market in rural areas, firms need to develop
strategies to target this segment effectively and provide better accessibility to
borrowers. When expanding, firms need to ensure consonance of services and
operations throughout the network.
Firms need to manage risks related to possible sharp fall in gold prices and non-
adherence of regulatory norms and also need to ensure that physical assets are
properly valued, stored and documented. Firms need to invest in technology to
better manage the increasing volumes and to reduce risks.

Conclusion
Gold loan has become one of Indias fastest growing businesses. The entry of
organized sector in recent years, especially the entry of new players like NBFCs
into the field of gold loan, has made the business more profitable and it attracted
widespread attention in the media. Even though the study was conducted in
collecting information regarding the nature, character and composition of gold
loan business in India, its socioeconomic impact and problems associated with
the sector on the basis of the research However, despite all the attention,
academic interest about the gold loan sector is lacking due to inadequate data.