With the worst of the pandemic-induced slowdown behind us, the economy is now poised to enter a new phase of growth. Whether it realises its true potential will depend substantially on the policy measures that follow from now on.
One of the immediate consequences of the lockdowns was the drying up of credit flow in the economy as banks and NBFCs became risk averse all at once. It is worth recalling that but for gold loans dispensed by NBFCs, practically every other source of credit went into a freeze for an extended period.
With the Finance Minister set to present the Budget in a few weeks’ time, it is important for the government to announce measures that will unshackle the large capital held with households in the form of gold.
India is home to the largest hoard of privately held gold worth about $1.5 trillion at current prices. This enormous wealth mostly lies idle while India goes capital hungry. Policy makers have for long tried, but failed, to monetise even a minuscule part of this hoard. Recent gold monetisation efforts have mostly tried to curb the fresh inflow of money into physical gold, as with the sovereign gold bonds.
However, the need of the hour is to look at monetisation of physical gold lying with rural and semi-urban households where the greater part of the stock lies. The only low-cost and palatable option (i.e. without melting) to increase the monetisation of this gold is to encourage credit against the security of household gold, i.e. loans against gold jewellery or gold loans.
While there are many large public and private establishments lending against gold, the industry remains largely unorganised. It continues to be dominated by moneylenders, pawnbrokers and jewellers operating away from the sight of regulators in lanes and by-lanes across India.
The existing policies are not conducive for large institutional lenders to emerge. How can this be remedied? For a start, the government could begin by removing some of the hurdles which impede lending activity.
For instance, the RBI recently permitted banks to offer gold loans going up to a loan to value (LTV) ratio of 90 percent for the period ending on March 31, 2021. Even as a temporary measure, this is a welcome step as it will help reduce the lure of the informal sector in gold loans. However, denying a similar benefit to the gold loan customers of NBFCs (where LTV is capped at 75 percent) excludes them unfairly. It pushes some of these borrowers back to the informal segment where no such rules apply. Indeed, a permanent removal of the LTV cap on gold loans is worth considering coupled with appropriate risk-weighted capital requirements.
Restoration of the priority sector lending (PSL) status for eligible gold loans such as microloans, loans to agriculturists and micro-enterprises would be another step in this direction. Gold loan NBFCs mainly cater to the bottom of the pyramid, where borrowing requirements are typically less than Rs 50,000 (equivalent to ~20 grams of gold as collateral) and for short periods of less than a year. Gold loans are extensively used by farmers, micro-entrepreneurs and shopkeepers for seasonal requirements of working capital or other pressing requirements generally not catered to by the banking system. A sizable chunk of gold loans is consumed by MSMEs for their short-term working capital requirements.
While gold loans given to farmers by banks are classified as priority sector lending, gold loans by the NBFCs do not get this benefit. This anomaly may be removed to make all micro gold loans (under Rs 50,000) eligible for priority sector lending status. This would enable gold loan NBFCs to mobilise additional funds and increase on-lending to weaker sections. Also, it would help transition a large section into formal and digital banking. Of the estimated 25,000 to 30,000 tonnes of household gold in India, the NBFCs have been able to monetise only about 500 tonnes. There is a huge opportunity for gold loan NBFCs to significantly grow the business.
Looking at the larger picture, gold loans are potentially a transformative force in India’s financial sector, particularly in promoting financial inclusion and in monetising India’s vast stock of private gold. Regulatory requirements that increase operating costs for gold loans and stifle competitiveness within the industry ultimately hurt a vulnerable section of society. It is hoped that the Budget will address these concerns.
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