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HSBC Vice President Abraham Cherian takes you through Gold Policy and Gold Loan Regulations in India


GGI Business Review is a new business series, capturing snapshots of the GGI Harvard Case Style Masterclass by CEOs and Industry Leaders.


This particular piece is a snapshot from Abraham Cherian's GGI Masterclass.


 

India has often been referred to as the GOLDEN BIRD in the past. It was primarily because of the abundance of gold among the country’s citizens. This love for gold in Indians has survived many invasions and is still going strong as India is one of the highest consumers of gold, of which 73% is used for jewellery, clearly indicating Indian households’ intimate connection with this precious commodity.

Now, even though India’s connection with gold traces back to many centuries, the policies around gold have only very recently adopted a proper structure with the recent regulations.


HSBC Vice President Abraham Cherian takes us through the intricacies of gold policy and gold loan regulations in India.


WHY GOLD?


The big question on why is Gold such a sought-after commodity revolves around its trust among the people. Gold is an asset usually bought as a safety net because of the trust people have in the country's economic environment, which places gold among one of the safest investment options.


RISE OF GOLD


Gold gained importance as an asset when people during the era of Emperor Aurangzeb could not transfer their lands to the next generations due to the rules set by the emperor. This led to people exploring alternate options of investment that could be transferred to their generations. Hence, gold came out as one of the standout options among people to put their wealth into.


MAJOR REASONS for GOLD's DEMAND


Now, with the rise in Gold’s demand due to trust among the people, there are multiple other reasons why a lot of people seek Gold:

1. Emotional value due to long traditions in the community

2. People’s lack of trust in the financial system and its inflexibility to adjust to people’s needs

3. Gradual increase in the price of gold over the long term due to limited availability of Gold

4. Gold is a good hedge against inflation as with rising inflation demand for gold also increases

5. No need to disclose stock of gold to the authorities (typical black money)


Additionally, investment in Gold produces high returns and is highly liquid with minimal documentation and tax-related hassles.


POPULARITY AMONG THE MASSES


Such is the popularity of gold, that even people from lower-income groups seek this metal due to numerous reasons like:

  • Flexibility of use: Gold can be easily used for multiple purposes, like performing financial transactions or for personal uses in the form of jewellery.

  • Ease of availability: Gold is easily available throughout the nation, with people storing it for multiple purposes

  • Trust is more than cash: Many people trust gold more than cash due to the ever-increasing value of this natural resource.


DEMAND FOR GOLD LOANS


Since gold is vastly available throughout the country, numerous Banks, NBFCs, and private lenders utilise this opportunity to provide loans against gold. Even though gold is more valued than cash, people still need cash to perform multiple financial transactions which are not possible with gold. For this purpose, people need cash to carry out such transactions. This is where the lenders come in and bridge the gap by providing loans against gold.


Moreover, people go to Banks and NBFCs as these institutions look forward to giving gold loans because, unlike normal loans, banks don’t need to look into the people's credit history, as gold is trustworthy collateral.


But now the question arises on why people take Gold Loans and what is their purpose behind this.


PURPOSE OF TAKING GOLD LOANS




  • EDUCATION: for funding the education of their children, people use their stock of gold to get loans to educate their children

  • HEALTH EMERGENCIES: during times of emergencies, people take such loans to meet their immediate demands for cash

  • BUSINESS: people also take gold loans to utilise the acquired cash for running their business operations

Now, when people decide on their purpose of taking gold loans, the next thing to look into is from whom to take such a loan.


VALUE PROPOSITION


  • Formal Gold Loan lenders: Such lenders enjoy high trust among people as they have a formal structure in place for lending. Additionally, such lenders charge lower interest rates than informal lenders. Example Muthoot Finance, Manappuram Finance.

  • Informal Lenders: Such lenders usually exist in the rural areas and enjoy good trust among locals as they offer good customer service apart from the fact that such lenders personally know the locals and are much more flexible in the collection of loans as compared to formal lenders.


NBFCs – THE KING OF GOLD LOANS


Following is the Value Chain of a Gold Loan starting from the rate at which NBFCs typically acquire funding, eg. 9.11% and then the rate at which they give out loans to customers as per their needs, i.e., 12-28%.




CUSTOMER PERSONA


Following is the Typical Customer Persona of people who usually take Gold Loans in the informal sector:

  • GENDER- Mostly Male

  • IRREGULAR INCOME SOURCES- Small Business, Informal Business Employee, Tradespeople

  • HOUSEHOLD SIZE: 4-5

  • MOST LIVE IN THEIR OWN HOUSE – Typically Lower Middle Class

  • CAN READ and WRITE VERNACULAR

  • Most have a BANK ACCOUNT

  • OWN A MOBILE PHONE- Most own low-end smartphones or other feature phones

  • LOW HOUSEHOLD SAVINGS- Very few of these people have household savings

The indicators for formal gold loan sector customers are better than the informal sector.


LOAN PORTFOLIO: PRODUCT MIX



RBI's CONCERNS WITH GOLD LOAN by NBFCs


  • Concentration of Assets: As per the RBI, the banks should check their overall portfolio weightage in one particular asset before lending money to any party.

  • Sources of funds: NBFCs would take short-term loans with 3-6 months tenure in the form of debentures to raise funds for lending and then give long-term loans to customers for a tenure of more than 9-12 months. This would lead to Asset-Liability Mismatch.

  • Large Scale expansion of Branches: With gold prices going up a lot of NBFCs started expanding their branches rapidly, but this led to increased issues of corporate governance and enhanced safety procedures among the new branches.

  • Documentation Process and KYC- Many people have illegal cash in the form of black money in their homes. They use this cash to pay off their gold loans, which leads to Tax Evasion.

  • Overcharging Interest- NBFCs charge a lot of interest as compared to banks while giving gold loans.

  • Auction of gold- If someone is unable to repay their gold loan, then the NBFCs would auction their gold to recover their money.


NEED FOR CONTROL


Finally, since gold is one of the most precious commodities in the world, it attracts a lot of investment from people who are looking for safe options to invest their money. Additionally, the traditions around this precious metal add to the already boosted demand for it.

With such demand, it becomes essential to have strong policies to control the flow of investment in this commodity.


 

Abraham Cherian is an army veteran, business strategy, and leadership enthusiast, great with data insights. Currently, he is appointed as the Lead Vice President of HSBC India’s Global Business Information Management division. Before this, he headed Business Planning, Loan Portfolio and Analytics division at Muthoot Fincorp Ltd. Abraham holds a Master of International Business degree from The Fletcher School at Tufts University, USA.


 

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