Why Do People Take Gold Loans?

In 2012, when the RBI set up the Rao committee to undertake a thorough analysis of the gold loan business, the committee members expressed their frustration that almost no data or reliable information was available about this age-old business.

- Shri V.P.Nandakumar

When Manappuram Finance Ltd. first entered the gold loans market in the latter half of the nineties, it also became the first NBFC in India to get into gold loans. Till then, this business was the preserve of the unorganised sector, the pawnbrokers and moneylenders who operated in lanes and by lanes across the country away from the oversight of regulators and policymakers. Indeed, India’s regulatory and policy-making establishment (as also decision-makers in the banking sector) were largely uninformed about gold loans and why it mattered to so many ordinary Indians. After all, there were no academic papers or studies about the share of gold loans in India’s credit market, and there was little awareness about what made people resort to gold loans. Consequently, in those early days, we found it difficult to convince bankers about the viability of the gold loan business in a corporate setting and getting them to extend loans to us was not easy. Of course, things changed once we had demonstrated by example how a business overlooked by the mainstream financiers could be so relevant to India’s macroeconomy.

Since those early days, gold loans have come a long way but we continued to face a dearth of verifiable data-backed understanding of gold loan customers. The main reason for the lack of representative information is that the gold loan industry is fragmented and dominated by the unorganised and unregulated lenders like moneylenders and pawnbrokers. To this day, less than a third of the estimated gold loan market in India is conducted via banks, nonbanks and other registered entities.