beyondbrics

Indians used to be a bit suspicious when it came to selling or pawning gold – it was seen as a sign of a man’s inability to earn a living. So selling gold jewellery and ornaments, traditionally viewed as secure investments, would only have been done in dire financial circumstances.

In fact, so deep-set is this feeling of shame that many Indians felt humiliated when the government pledged its gold deposits abroad to borrow money during the 1991 financial crunch. But now it seems times are changing.

The long-established business of lending money against gold, usually by local moneylenders or pawnbrokers (75 per cent of the gold loan market is held with the unorganised sector), is being modernised.

In recent years, a number of Kerala-based non-banking financial companies have professionalised and scaled up the gold loan operation, but now it looks like major Indian banks such as ICICI Bank and HDFC Bank are trying to get a piece of the cake – realising the huge potential in this relatively untapped market.

Since the start of the year, as prices of gold reached record highs, finance companies and banks have aggressively pushed the idea of gold loans through television, radio and print, forcing Indians to reconsider their inhibitions. In fact, many of these advertisements show women taking the lead in the decision-making and for example selling their gold jewellery in order to fund their child’s university education.

Professional gold loans are an attractive prospect for borrowers, who are charged lower interest rates than the sky-high levels of the local moneylenders. Due to the unregulated, informal nature of the community-based money lending business, those in need of money can quite easily get caught in a cycle of spiralling debts and it is common to lose your land or home in the event of a default.

“While local moneylenders may charge interest rates as high as 25 per cent, banks will charge between 14 to 17 per cent. But gold loans from a bank or professional organisation are more attractive because borrowers can guarantee the purity and surety of the service. Also, for gold loans minimal identity documents are required making it easier for those working in the informal economy to get financing even on the same day,” said a spokesperson for ICICI Bank.

By formalising the nature of the business, and by using their gold as collateral, a safe and secure means of financing may be provided for 90 per cent of India’s workforce who are employed in the unorganised sector.

The country’s banks have also realised the potential in India’s rural communities, who hold around 60 per cent of the country’s gold stockpile. This could also be a vehicle of transformation for rural people, who currently have no choice but to go to a local moneylender, as they have difficulty in accessing banks.

But while the sentiment is there, transparency and regulatory measures are most definitely needed to bring the business into the organised sector, so that protected gold loans can bring timely credit to the masses.

Whether a long-engrained culture that frowns on the very idea can change remains to be seen.