An Overview of the Glittery Gold Loan Industry – 10X10Y

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Gold in India

Gold enjoys a vital place in the hearts and homes of Indians and is often considered as being representative of their financial security, social status and cultural legacy. Gold has traditionally been a liquid asset and universally accepted commodity that has seen its value appreciate over the decades. It comes as no surprise that India has a special affinity for Gold. India is one of the largest markets for gold and its gold reserves have grown substantially in the past couple of decades. The 293 Million households in India hold an estimated 25,000 Tonnes of the yellow metal, accompanied by 700 to 800 tonnes of Gold demand each year. In the past decade, despite high tariffs, India has imported 8,400 tonnes of Gold, more than the holdings of America’s Federal Reserve, the world’s largest repository.

(Source: IMaCS analysis, World Gold Council, *Gold prices available till annual year ’18)

Borrowing against gold is one of the popular instruments based on physical pledge of gold and it has been working well with Indian rural household’s mindset, which typically views gold as an important saving instrument that is liquid and can be converted into cash instantly to meet any urgent needs.

65% of the Gold is estimated to be held by the rural India and more than 40% of the gold demand comes from South India. Coming to Gold loans, 50% of the gold loan business comes from more South India and a vast majority of Gold business comes from the rural population. Coincidence? I think not. The gold loan is a direct beneficiary of the Gold demand in India. With the ever increasing demand for the Yellow Metal, the Gold Loan industry has had a substantial growth in business.Gold loan business is also directly correlated to Gold prices, which as seen above has been on a continuous uptrend. Historically, balance‐sheet growth for gold‐loan financiers has traced gold price movement. Muthoot and Manappuram’s balance sheet growth has historically shown high correlation to gold‐price movements with a high coefficient of up to 0.97x over the years.

Gold Loan Industry :
Organised vs Unorganised

It’s needless to say, the Gold Loan industry is massive, but it is also massively untapped. The total gold loans outstanding in the organised sector in 2019 are estimated at 5.5% of the total household gold holdings in India, indicating extremely low market penetration.

The major players in the organised gold loans market in India are commercial banks, cooperative banks and gold loan NBFCs known as non-deposit taking, systemically important NBFCs. In addition to a growing organized gold loans market, there is a large long-operated, un-organised gold loans market which is believed to be several times the size of organised gold loans market. Traditionally, the rural sector was being catered mainly by the unorganised lenders like the pawnbrokers, jewellers etc. who charged hefty amount of interest on these loans. However, in the past decade the scenario has changed and the organised lenders have been expanding their reach to the rural segment and south Indian population.

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In 2020, the organised gold loan market comprising banks (public, private, small finance and co-operative), Non-Banking Financial Company (NBFCs) and Nidhi companies contributed to nearly 35% of the Indian gold loan market. A good 65% is still contributed by the organized market, which leaves a whole lot of room for the organised players to grow in this market.

There are no official estimates available on the size of this market, which is marked with the presence of numerous pawnbrokers, moneylenders and land lords, operating at a local level. However, the following has been accumulated with the available data,

Seizing the vast untapped potential available for lending against gold, the organised players such as NBFCs became more aggressive in the gold loans market and a significant part of the gold loans likely to have shifted from the un-organised lenders to the organised lenders, thus fueling a strong growth in the organised market share. As it can be seen in the above table, the organised players have been on a constant drive in snatching market share from the unorganized players.

Source : IMaCS

The Indian Gold Loan Market grew by 9.5% in FY19 from Rs. 1,60,000 crores to Rs. 1,75,000 crores and has risen from a petty 12,000 crores in FY07 to 1,75,000 crores at an astounding 25.02% CAGR. However, in the last 5 years growth has slowed to a 5.32% CAGR. However, in the last 3 years the growth has improved to 7.72% CAGR and 9.85% CAGR in the last 2 years. IMaCS estimates The Gold Loan Market to grow between 9.5% to 11% over the next few years and reach a market size of about Rs. 2,30,000 to 2,50,000 crores by FY 2022. Among the key risks, a major risk to the above projections would be any further stringency in RBI’s stance on the sector.

The major players in the organised gold loans market in India are commercial banks, cooperative banks and gold loan NBFCs. The market share mix between them has been quite interesting.

Traditionally, banks and unorganised lenders were the key players of the gold loan industry but that doesn’t hold true anymore. The major gold loan NBFCs have shown a commendable growth and hold a major chunk of this sector. Gold Loan NBFCs have been the only players to have increased their market share over the last decade.

Even in the current phase of the gold loans market, Specialised Gold loan NBFCs have again emerged as the key players in the organized sector. Specialised Gold Loan NBFCs have a single-minded focus on the gold loan segment and view it as their bread and butter segment. This unified focus has enabled these NBFCs to develop processes and systems tailored for catering to the gold loans segment which is small ticket size, requires quick turnaround and demands expertise in a host of operational aspects such as valuation of gold, safeguarding the pledged gold and ability to recover adequate value on gold auctioned to contain any possible credit losses. One of the key strategic initiatives that has strengthened the position of specialised NBFCs is that they have managed to create a first mover advantage for themselves in the Non-South gold loans market in India, where until recently; competition has been negligible from other categories of lenders.

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Key Players in the Organised Gold Loan Space

The following table displays the Gold Loans AUMs of the top players in the organised space. Assets Under Management (AUM) for an NBFC are the net disbursements by an NBFC. AUM is a key metric to analyse the performance of any NBFC. Higher the AUM, the better. The following table demonstrates how the key players have fared over the last 13 years.

Key points to be noted:

  • In terms of leading lenders, Muthoot Finance Limited retained its position as the largest gold loan provider with an estimated portfolio of Rs. 33,585 crores and an estimated market share of 19.2% in FY 2019 (compared to 18% market share in FY18).
  • AUM of Muthoot Finance grew by 21.4% in FY20 to Rs. 40,772 crores vs just 16.4% in FY19.
  • Indian Bank and Indian Overseas Bank occupied the 2nd and 3rd position with an estimated market share 17% and 7.6% respectively (compared to 14.7 per cent and 7.9 per cent respectively).
  • Manappuram Finance Limited was the 4th largest market player with an estimated market share of 7.4% (compared to an estimated market share of 7.3% in FY18). Gold loan portfolio of Manappuram increased from Rs. 11,734 crores to Rs. 12,961 crores between FY18 & FY19.
  • Another major player Muthoot Fincorp’s gold portfolio increased from Rs. 11,445 crores to Rs. 12,302 crores in FY19 compared to FY 2018.
  • Of the other NBFCs, India Infoline Financial Services (IIFL) has shown a significant growth in its gold loan portfolio from Rs. 4,037 crores in FY18 to Rs. 6,195 crores in FY19.

This is a closer look at the NBFC industry.

Muthoot is a clear leader of the NBFC Gold industry with Manappuram and Muthoot Fincorp close enough for the second spot. However, it’s worth noting the astonishing growth each one of them have had.  These three players together manage north of 85% of the NBFC Gold Loan assets.

Evolution of the NBFC Gold Loan Industry

The NBFCs in the gold loan industry have had a long journey to get to the humongous scale they are at today, and it’s not been an easy one. They’ve had to fight the inorganized sector for their fair share. They’ve fought the banks to scale their business. In the meanwhile, they’ve also fought each other for the business.

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Let’s look at the gist of their journey getting here:

Source : KPMG

NBFCs have had their fair share of ups and downs, but they’ve weathered the storm.

Profit Pool of the Gold Loan Industry

Now that we have an idea of the biggest players in the industry, it would be ideal to understand how well the industry players are earning. Profit pool analysis helps us understand the profitability of each industry constituents as compared to their size. Size of a company is usually determined by the company’s capital employed or invested capital, but in case of banks or NBFCs, AUM of a company can be a better judge of size. Also, note that we will be taking ROE which is Return on Equity to judge profitability. Usually, ROCE/ROIC is a better guide for profitability but for banking and NBFCs who have majority of their Balance Sheet to be debt, ROE would be considered to be the gold standard. Next, I would compare ROE with Cost of Equity to get Economic Profit. This Economic Profitability in contrast to the NBFC size(AUM) would help us conclude our Profit Pool analysis.

wrote a piece earlier which discusses what should be an ideal Cost of Equity for our profitability calculations. I also wrote another piece which discussed how economic profitability is a key metric for us to look at. Do take a look for better clarity.

Manappuram and Muthoot together contribute close to 95% of the collective NBFC industry’s profit and close to 75% of the NBFC industry’s AUM. The third biggest Gold Loan NBFC, Muthoot Fincorp delivered a negative economic profit.

Looking at their Profit Pool was quite interesting.

At the face of it, Muthoot seems to be more profit efficient, by contributing 87.54% of the industry’s profit with just 70.71% of the AUM in FY16. However, Manappuram caught on the race and contributed 21.73% of the profit (up from 12.46% in FY16) but still with a higher 27.85% AUM.

IMaCS expect the Gold Loan NBFCs to increase their geographical reach and therefore their market share. Specialised Gold Loan NBFCs are expected to further strengthen their presence in Non- South geographies, where competition from the organised sector is still relatively less compared to the Southern & Western India. However, given the competition from fintech companies and innovative strategies adopted by other market players, overall competition in this sector is expected to rise.

I hope this article gives you a decent gist of the Gold Finance Industry.

Thank You.

Source : IMaCS Report and Annual Reports of Companies.

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Moulik Jain
Moulik is 24, an Entrepreneur, and a successful Angel Investor at Beardo (exited). He is currently one of India's youngest Angel Investors.
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