The demand for gold loans is growing rapidly in India, especially in rural and semi-urban areas, where it is promoting financial inclusion. Digital technology, security measures, and regulated processes are making gold loan companies stronger and contributing to economic growth.

Culture, sentiment, and financial needs – these are the three reasons that maintain the continued demand for gold and its special status in India. Gold jewellery has emotional significance in Indian society, and it is passed on from generation to generation. For Indian families, it is not just a metal but also a symbol of social prestige. Even during times of economic difficulties, due to this emotional attachment, people do not want to sell it, but prefer to mortgage it to meet their financial needs.

That is why, despite the rise in gold prices, the demand for jewellery remains. People have now understood that gold is not just a jewellery but a family asset. This is why instead of selling it, they prefer to mortgage it and take a loan. The true value of gold is realized only when it is used as an important credit source and can be reclaimed without any loss.

Growth of Gold Loan Market

According to the ICRA report, the organized gold loan market is expected to reach ₹15 lakh crore by March 2027, growing at a compound annual growth rate (CAGR) of 25%. In the financial year 2023-24, the organized gold loan market recorded tremendous growth and reached ₹7.1 lakh crore. According to a report by PwC, the total estimated wealth of gold held by Indian households is around ₹126 lakh crore. The economic importance of this wealth is immense, and it can be made more productive through gold loans.

Importance of Gold Loan

The importance of gold loans is constantly increasing in the country, especially due to its economic implications. It is also playing an important role in financial inclusion, especially in rural areas where access to credit is limited. It helps small traders meet their working capital needs. Gold loans are also gaining popularity because there are no prepayment charges, interest is only payable on the outstanding amount, payment flexibility, and options like bullet payments.

Contribution to rural India

Financial institutions have immense potential in rural areas, where 90% of the market is still untapped. By taking credit to every household in villages, providing financial support to small businesses, and attracting customers from traditional moneylenders to the organized credit market, gold loans have contributed significantly to the economic development of rural areas. This market is growing rapidly due to the increasing use of digital technology, customized services, simplified process and less documentation. This has led to a shift in customers from unorganized moneylenders to organized financial institutions, thereby strengthening financial inclusion.

Rules and Regulations

Gold loans have always been a regulated business, and strict regulations have been laid down on it by the RBI. Regulatory amendments from time to time have made the industry more transparent and organised. Traditional gold loan companies prioritise customer trust, transparency and risk management. The industry is further empowered by guidelines and advisories issued by the RBI from time to time. This has provided the industry with a stable and secure environment, which is essential for its sustainable growth.

Portfolio Performance

The gold loan portfolio has stood the test of time and has witnessed minimal credit losses over the decades. Traditional companies strictly adhere to gold purity, correct weight assessment and regional LTV (Loan-to-Value) standards to minimise risk.

Today, customers expect not just loans but also personalised experience, transparency, convenience and tailored solutions. NBFCs are able to cater to customer needs through a range of customised products and services.

Security and Tech Adoption

The gold loan market is a highly process-intensive industry, and the biggest responsibility of lenders is the safety of customers’ gold. Customers trust NBFCs because they are assured of the safety of their pledged assets.

Security measures such as high-security vaults, multi-factor authentication, 24/7 CCTV surveillance, alarm systems are adopted to protect gold. Apart from this, new technologies such as biometric authentication are also being used. Due to the strong risk management model developed over the years, gold loan companies are now able to handle risk better.

Conclusion

Gold loans remain a reliable and effective means of credit access in India, especially for rural and semi-urban areas. It is a major factor promoting financial inclusion. Also, regulated processes and transparent governance will keep the sector strong.

Traditional gold loan NBFCs are constantly improving their decades-old robust control mechanisms to meet the changing needs of customers. Moving away from a ‘one-size-fits-all’ approach, these companies are now working with personalised services and technological innovations.

Gold loan companies are poised to make a significant contribution to the goal of ‘Developed India 2047’ through financial inclusion and supply of small credit. The sector is playing a vital role in nation building, especially in rural and semi-urban areas.

(This article is written by Shaji Varghese, Chief Executive Officer (CEO), Muthoot Fincorp Limited (MFL).)