The Concept

of Gold loans in India : Problems and Prospects

1

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR, CHHATTISGARH

Economics Project

Topic: The Concept of Gold Loans in India

Submitted by;

Submitted to;

Ishita Chakrabarty,

Mrs. Eritriya Roy

Sem- 1, Sec- B, Roll no. - 80

Faculty, Economics
H.N.L.U. Raipur

The Concept
of Gold loans in India : Problems and Prospects
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ACKNOWLEDGEMENTS
It gives me immense pleasure to write this project Gold loans in India: Problems and
Prospects.
Firstly, thanks to the Almighty who gave me the strength and determination to put all my
endeavours into this work.
Secondly, Id like to thank our Economics faculty, Eritriya Maam for allotting such an
enlightening topic and for all the help and co-operation extended by her in helping scrutinize
the same.
Thirdly, Id like to thank my parents and friends for all their constant support without which
this venture would not have been possible.
Last but not the least, I would like to thank the Library staff and my respected seniors for
extending their help in finding the relevant books and articles required for the work.

The Concept
of Gold loans in India : Problems and Prospects
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DECLARATION
I, Ishita Chakrabarty, a student of Semester 1, Hidayatullah National Law University
Raipur, hereby declare that the project work titled Gold Loans in India : Problems and
Prospects is a genuine and original record of work done by me under the able Guidance of
Ms. Eritriya Roy, Faculty, HNLU Raipur.
Ishita Chakrabarty
Semester 1 Section B
Roll No- 80

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of Gold loans in India : Problems and Prospects
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TABLE OF CONTENTS
Brief Overview
Objectives and Research Methodology
Introduction
History and Current status of Gold loans
Definition and Purposes
Essential Documents required
Advantages of Gold Loans
Table overview
Risks Involved
Regulatory Environment
Development and Future Outlook
Conclusion
References

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BRIEF OVERVIEW
Loans form not just an important source of revenue for banks and other financial institutions,
they also add to the economy. A borrower has a wide array of loans to choose from according
to his convenience. The most recent of them being, Gold loans.
Gold loans has 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. Also Gold serves
really no purpose idle stacked away in the lockers. It can thus be put to more beneficial
purposes.

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of Gold loans in India : Problems and Prospects
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OBJECTIVES
This project seeks to answer the following questions.
1. What is the concept of Gold loans and how does it function?
2. What are the advantages of Gold loans over traditional loans such as Personal Loans?
3. What is the scope of Gold loan in India?

RESEARCH METHODOLOGY

The Concept
of Gold loans in India : Problems and Prospects
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This project work has been carried out following the descriptive and analytical approach. It
provides a deep approach into the topic of Gold Loans and further scrutinizes all the aspects
of the same. Books and other references (including various websites) were primarily helpful
for the completion of this project. Footnotes have been provided wherever necessary.

The principle of spending money to be paid by posterity, under the name of funding, is
but swindling futurity on a large scale. - Jefferson1

INTRODUCTION
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

1 Source: Google quotes

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of Gold loans in India : Problems and Prospects
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finance charges as may have been specified, that acts as an incentive for the lender to engage
in the loan.2
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.
It is essential to know the Typesof loans before proceeding further into the concept of gold
loans. Loans can be classified into the following types:1. Secured Loan A secured loan is one where the borrower pledges some asset (house,
care, fixed deposits, and gold) as security. This is referred to as collateral. It usually
has a lower interest rate considering the low risk on lending.
A mortgage is the most common instance of a secured loan where the property serves
as collateral in lieu of the money, or material goods borrowed. The financial
institution is given a lien on the title to the house until the mortgage is wholly paid.
However if the borrower defaults on the loan the institution would have the legal right
to repossess the property and sell the same for the sum equivalent. Similarly there are
direct and indirect auto loans where the interest period is shorter.
2. Unsecured loans on the contrary do not require any collaterals against monetary
transactions. Interest rates on unsecured loans are nearly always higher than for
secured loans, because an unsecured lender's options for recourse against the
borrower in the event of default are severely limited. They are available in the
following guises- credit card debt, personal loans, bank overdrafts, credit facilities or
lines of credit, corporate bonds (may be secured or unsecured) and peer-to-peer
lending.
2http://www.investopedia.com/terms/l/loan.asp last accessed on 22nd August 2015 9:00 p.m.

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of Gold loans in India : Problems and Prospects
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3. Concessional loans Concessional loans have typically longer grace periods and are
lower on interest rates than that which normally prevails in the market. They are
normally given by foreign institutions or governments to developing countries or as
an employee benefit.
They can be further subcategorized, according to whether the borrower is an
individual consumer or an entity, into the followingA. Personal loans - Common personal loans include mortgage loans, car
loans, home equity lines of credit, credit cards, installment loans and
payday loans. The credit score of the borrower which defines his credithistory and ability to repay is a major component. Repayment is usually
through fixed amount instalments over a fixed term.3
B. Commercial loans - Loans to businesses are similar to the above, but also
include commercial mortgages and corporate bonds. Underwriting is not
based upon credit score but rather on credit rating.

GOLD LOANS IN INDIA: HISTORY AND STATUS

The concept of Gold loans is not a new phenomenon to the Indians. Lending against gold has
been in vogue since the very inception of the process of lending. The origin dates back to
several centuries when it was used as the main commodity of exchange in the system of
barter and trade. The same holds today for the fulfilment of short term financial requirements.
India holds the repute of being the largest user of gold ornaments in the world with states
like Kerala and Tamil Nadu topping the list on Indian cities. Taking advantage of this, several
Southern companies have roped in to capture the market. Banks in coastal Karnataka (like
Syndicate Bank and Canara Bank); Kerala (Federal Bank, South Indian Bank, Catholic
3 http://www.businessdictionary.com/definition/personal-loan.html last accessed on 22nd August
10:05 p.m.

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of Gold loans in India : Problems and Prospects
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Syrian Bank and Dhanalakshmi Bank) and in Tamil Nadu (Indian Bank, Indian Overseas
Bank, Karur Vysya Bank and Lakshmi Vilas Bank, among others) entered the gold-loan fray
during the 60s in a grand manner4. Several commercials promoting institutions, such as
Mannapuram gold and Muthoot finance group, raging in the media show the extent to which
the market for gold has flourished.
The origin of gold loans took place in the Southern states where the landowners and
moneylenders would traditionally lend money against gold at exorbitant rates but without
many restrictions for special occasions. This practice continued for several years in the
unorganized sector with the pawnbrokers. Their business is impeccable, but the problems
arose with the increase in the market rates and interest rates of gold to as high as 24-32%.
Most of the borrowers were from relatively lower grounds who lost everything since repledging was not possible. When the finance companies collapsed in the 80s the people lost
all their money. Finally the commercial banks and other Non-banking financial institutions
evolved that, in the present day, control up to 25% of the market demand 5. The interest
rates were regulated by the RBI and were further regulated after the nationalization of banks
took place in 1969.

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.

4http://www.moneylife.in/article/how-gold-loans-became-popular-over-the-years-i/9891.html last
accessed on 24th August 10 p.m.
5http://www.cognizant.com/InsightsWhitepapers/Surveying-the-Indian-Gold-Loan-Market.pdf
accessed on 24th August 11:30 p.m.

The Concept
of Gold loans in India : Problems and Prospects
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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
provided6. 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 of close to 40% in the recent years. NBFCs
have been a major force for this growth due to their extensive network, higher loan-value
ratio and lower turnaround time. Banks have also followed cue, and are gaining ground. With
raging growth, regulatory scrutiny has been beefed up on lending practices such as rigorous
implementation of Know Your Customer (KYC) norms. The RBI also assesses the
concentration risk that may result from a steep drop in prices.7
Like every other loan, gold loans charge processing fees, interest charge, valuation charge,
late payment penalty and pre-payment penalty. Some of the lending organizations may not
charge all the fees. It is essential that the borrower goes through all necessary terms and
conditions since it may affect the outstanding amount.

ESSENTIAL DOCUMENTS FOR AVAILING LOAN

The documentation process for obtaining a loan against gold is simple, easy and available
over the counter instantly.

6http://in.reuters.com/article/2009/12/14/idINIndia-44013320091214 last accessed on 24th August

6:30 p.m.
7http://articles.economictimes.indiatimes.com/2011-06-03/personal-finance/29617389_1_gold-loangold-prices-loan-size last accessed on 24th August 9:00 p.m.

The Concept
of Gold loans in India : Problems and Prospects
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Very often all one needs to do is walk up to any non-banking lending institution and avail the
money in as less as 15 minutes as advertised. The documentation required is usually less as
compared to that of banks, where one might be asked to show ID proof and other personal
details and also to prove whether the gold is actually owned by the person.
In case of Non-Banking lending institutions, however, a higher rate of interest is charged
since they do not evaluate the credit-worthiness and process is less rigorous.
Given below are a list of documents that are usually required however the list might change
according to the lending company8:-

1. Identity proof of the applicant Voter's ID, Passport or Driving License

2. Signature proof Passport, Voter's ID, Driving License or any other document with
the borrowers authentic signature.
3. Address proof ration card, electricity bill, telephone bill and other document which
authenticates the borrowers current residential address.
4. Twopassport size photographs
Again, one should avail of the loan only when one is sure of repaying it. It is
important to do a bit of market researching to have a good idea of the interest rates
and loan-to value that is being offered instead of randomly selecting a lender.

ADVANATGES OF GOLD LOANS

Gold loan is a secured loan- where gold ornaments, bullions or coins are kept as a
security.
1. Purpose- This loan can be used for any number of purposes but towards the
commission of any illegal activity or speculation in the share market. NBFCs have
fewer restrictions on the purpose of the loan.
2. Easily availed- The loan applicant does not have to disclose his income or salary.
It can be availed by non-working individuals too.
8http://www.vitt.in/loans/gold.html last accessed on 2nd September 5:00 p.m.

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of Gold loans in India : Problems and Prospects
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3. Quicker disbursal- The loan is disbursed quickly and with less documentation
involved so it can be utilized for immediate purposes. Disbursal through NBFCs
span a couple of minutes while those from banks may require a maximum of one
or two days.
4. Higher loan to value ratios- Gold loans have a higher Loan-to-value ratio.
NBFCs offer up to 95% of the purity of the gold while banks restrict themselves
to a maximum of 75%.
5. Shorter loan tenures- There is no minimum tenure. If need be, it can be paid the
very next day. Average loan period varies from 90-100 days.
6. Interest rates- The interest rate varies according to the tenure and amount of loan.
In the case of NBFCs it is higher, around 25% whereas it can be around 12-15% in
the case of banks. Rates of interest are reasonable where the LTV rate does not
exceed 50-60%.
7. Repayment options- Repayment can be made in one lump or it can be in done in
instalments.

Loan

Muthoo

Mannapura

Muthoo

Indian

Indian

Federal

ICICI

Features

m gold

Bank

Overseas

Bank

Bank

Finance

Fincorp

Bank

.
Rate
Interest

of 12%
21%

Loan to Value Avg

ratio

to
of Upto 85%

72%,
high
85%

13.45%

12.25% to 12%

to 24%

15.25%

Up
90%;

of

12.5%

to Lower of
70%

or

100% in value
some

based

on

cases

rate

per

gram and
net weight

to 13.5% to 10.5%
15.75%
Up
85%

16.5%
to

to

The Concept
of Gold loans in India : Problems and Prospects
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Loan tenure

6 to 36

6 months 6 months to

months

to

12 12 months

months
Disbursal time

5 mins

5 mins

3 mins to

30 mins

4 hours
Purpose

Any

Any

Any

any

Commercia

any

any

l only
Documentatio

Only ID

Only ID

Only ID

ID

proof Proof

of Asset

and asset commercial

ownershi1.

ownership

activity;

document

unaudited

balance sheet account

Ad

proof dress and

and bank ID proof,

for > 3 lakhs

Proof

of

land
holding for
agricultural
loan

of

more than 1

Processing fee

Rs. 5 to 0.5%
75,based
on

loans

loan greater

amount

than

for Rs. 202 per 0

lakh; Rs. 300
appraiser
Rs. commission

25,000

Fig. 1.0
The above chart shows a feature comparison between the various NBFCs and Banks
existing that provide gold loans.9
Assets at the disposal of non-banking lenders such as Muthoot have increased by 20 per cent
annually for the past five years to a whopping $670 billion, according to a November report
by the Financial Stability Board. That makes India the worlds second-fastest-growing
market, after Indonesia, for lending outside the banking system, or shadow banking. It
9http://www.icicibank.com/Personal-Banking/loans/gold-loan/interest-rate-and-charges.page?
#toptitle; http://www.muthootfinance.com/services/gold_loan;
http://www.manappuram.com/php/goldfaq.php; http://www.federalbank.co.in/gold-loans;
http://www.indian-bank.com/loans.php?by=15&ty=1; http://www.iob.in/CCC_jewellery.aspx
accessed on 2nd September 8:00 pm

lakh.
1% of loan
amount.

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of Gold loans in India : Problems and Prospects
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also poses risks for a country where 65 per cent of the population and 92 per cent of small
businesses dont have access to banks10.

RISKS GENERALLY INVOLVED

Where lenders take possession of the gold assets in a loan transaction, in case of a theft they
may not have sufficient funds to compensate all the borrowers for their loss in its entirety.
This is more important for loans placed in the unorganized sector. Banks and NBFCs usually
have better security and insurance coverage. Regardless, financial packages cannot
compensate for the personal attachment a borrower has with the gold assets. Often, the
jewelry is in the nature of a family heirloom, acquired during important occasions like a
marriage, or the birth of a child and so on.
In the way that the black component in real estate deals results in undervaluation of property,
so too does the making charge add to the security of the lender in gold loans. Because making
charges are not financed even as they get priced into all purchases of gold jewelry, it's a
hidden cushion to the lender the way the black money component in a real estate transaction
is.
10 According to World Bank reports accessed through http://www.business-standard.com/search?
type=news&q=World+Bank

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of Gold loans in India : Problems and Prospects
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A sharp decline in gold prices increases the original LTV. A lender may require an immediate
recovery of any amount that exceeds the original LTV ratio, but the borrower may be unable
to pay this amount. Restructuring of the loan may be required in these cases. Additionally, if
the value of the pledged asset declines, a borrower may be more willing to default on the
loan. This poses a serious concentration risk to the lender, especially to the NBFCs that
have a high exposure to gold loans and lend at high LTV ratios. The increase in gold prices
over the last few years, coupled with the surge in gold loan borrowings during this period,
could create a gold bubble which could burst in the event of a significant correction in gold
prices. Banks and NBFCs with significant exposure to gold loans could face widespread
defaults, which could adversely impact the economy. The organized sector today manages
these risks through various methods such as enhanced security, insurance cover, buying gold
futures, etc.

REGULATORY ENVIRONMENT
While there are no means of controlling the unorganized sector, the organized sector of banks
and NBFCs come under the purview of the Reserve Bank of India (RBI) which has norms to
regulate the gold loan market.
NBFCs had been traditionally disbursing gold loans through funds received from banks under
priority lending for the agricultural sector. But the RBI, in February 2011 ruled that bank
credit to NBFCs for lending against gold jewellery will not be treated as exposure to the
agricultural sector to reduce the risk factor in the system. The resulting higher interest rate for
funds is expected to promote better lending practices by NBFCs to creditworthy borrowers
especially in the light of the higher concentration risks (risks due to a sharp decline in the
prices of gold for a lender with a large exposure to gold assets pledged against the loans), that
now pose a threat to the economy.

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of Gold loans in India : Problems and Prospects
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All lenders are required to adhere to the KYC norms. NBFCs allegedly have not strictly
followed this regulation and hence have been under the RBIs scanner for some time now.
Currently, NBFCs gold loans are regulated by RBI. However, some state governments
require compliance with relevant state money lending statutes. If the state governments
succeed in enforcing this regulation, the profit margin of NBFCs would witness a further
drop.

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.

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of Gold loans in India : Problems and Prospects
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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.

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.

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of Gold loans in India : Problems and Prospects
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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.

REFERENCES
The following are the list of websites that have been looked into for reference.
1) http://articles.economictimes.indiatimes.com/2011-06-03/personalfinance/29617389_1_gold-loan-gold-prices-loan-size
2) http://in.reuters.com/article/2009/12/14/idINIndia-44013320091214
3) http://thegoldwatcher.blogspot.in/2011/05/indian-gold-loan-marketexpanding.html
4) http://www.apnapaisa.com/loan/gold-loan-india/rates.html
5) http://www.businessdictionary.com/definition/personal-loan.html
6) http://www.cognizant.com/InsightsWhitepapers/Surveying-the-Indian-GoldLoan-Market.pdf
7) http://www.federalbank.co.in/gold-loans
8) http://www.icicibank.com/Personal-Banking/loans/gold-loan/keyfeatures.page
9) http://www.indian-bank.com/loans.php?by=15&ty=1

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10) http://www.investopedia.com/terms/l/loan.asp
11) http://www.iob.in/CCC_jewellery.aspx
12) http://www.jagoinvestor.com/2011/12/5-personal-loan-alternatives.html
13) http://www.manappuram.com/php/goldfaq.php
14)
http://www.moneylife.in/article/how-gold-loans-became-popular-over-theyears-i/9891.html
15) http://www.moneylife.in/article/how-gold-loans-became-popular-over-theyears-i/9891.html
16) http://www.muthootfinance.com/services/gold_loan
17) http://www.neytri.com/gold-loans-what-you-must-know/
18) http://www.thehindu.com/business/Economy/article2376650.ece
19) http://www.vitt.in/loans/gold.html