Industry Map of the Gold Loan Industry – 10X10Y

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There are multiple factors that directly and indirectly affect an industry. The Gold Finance industry is no different, there are quite a few of such factors. While researching an industry, it becomes extremely important to have an understanding of such factors and the impact of such factors on our industry. It is for this reason that I have developed an Industry map, showcased below. This industry map comprises of numerous factors that either directly or indirectly affect the profitability of the business.

  • Customers – Customers are the most crucial element of any business and so it is for the Gold Loan industry. These customers are primarily individuals who possess gold jewellery but could not access formal credit within a reasonable time, or to whom credit may not be available at all, to meet unanticipated or other short-term liquidity requirements. The exponential growth of the Gold Loan industry can be directly attributable to customer demand of such loans.   However, these are the same customers who could bring credit risk to the industry. Credit risk is the possibility of loss due to the failure of any customer to abide by the promise of the gold loan repayment. Credit risk of an industry/company is measured by NPAs. Every company targets to keep their NPAs and thus credit risk in control. Credit risk in Gold Finance segment as compared to the NBFC segments is relatively low because all loans are adequately collateralised with pledged gold.
  • Funding Sources – The liquidity and ongoing profitability of any company in the Gold Finance industry are in large part dependent upon the timely access to cost effective sources of funding. The funding requirements historically have been met through a combination of borrowings such as working capital limits from banks, issuance of commercial paper, non-convertible debentures issuance through public issues and on private placement basis.
    Any company’s ability to raise funds, on acceptable terms and at competitive rates, continues to depend on various factors including our credit ratings, financial performance & growth prospects of the Company, the macro economic factors including regulatory environment and policy initiatives in India, developments in the international markets affecting the Indian economy, investors’ and/or lenders’ perception of demand for securities of NBFCs.
    It is also extremely important to maintain good relationship with banks, just like how it is important for any other company to maintain a good relationship with their suppliers.
  • Regulations – The Gold Finance industry is regulated by the reserve bank of India (RBI). RBI in the last decade has come up with a lot of rules and regulations that have directly been both advantageous and disadvantageous for the industry.RBI has rule that the bank’s exposure to a single NBFC which is predominantly engaged in lending against collateral of gold jewellery, cannot exceed 7.5% of banks’ capital fund. This is disadvantageous to the industry as it makes borrowing for NBFCs more difficult. On the other hand, RBI over the last decade has increased LTV for Gold Loans from 50% to 75% to now 90%, which is advantageous for the industry as it makes lending more easier. Moves by RBI directly affect the Gold Finance industry.
  • Credit Rating Agencies – Credit rating agencies have a direct impact on the business. The cost and availability of capital is dependent on short-term and long-term credit ratings. Any downgrade of credit ratings would increase borrowing costs and constrain the access to capital and debt markets and, as a result, would negatively affect a company’s net interest margin and the business.
  • Interest Rates – Gold Finance companies provide loan at a fixed rate of Interest while borrowing funds at both fixed and floating rates. As the interest rates fluctuate, it directly affects the industry and it’s margin.
  • Economic Conditions – A significant majority of our customer base belongs to the low to medium income group and/or the small enterprises finance sector who may be more likely to be affected by declining economic conditions than large corporate houses. Any decline in in the economic conditions may impact the repayment capabilities of our borrowers, which may result in increase in defaults, thereby adversely affecting our business and financial conditions. The conditions of the Economy are integral to the Gold Loan industry.
  • Employees – Employee cost which is the second biggest expense for any Gold Finance company, is crucial for the industry. The customer experience is the differentiating point for the industry, without which the industry wouldn’t stand a chance against the much cheaper offerings of Banks. The employees should have undergone rigorous training in credit risk analysis too. For an employee doing gold appraisals without adequate training could lead to detrimental losses.
  • Competition – The Gold Finance industry has grown multi-fold in the last two decades. This has led to competitive intensity with financial institutions in other segments as well. Recently, Bajaj Finance, a consumer finance company declared that they would be entering the space as well. Even banks such as SBI and ICICI have increased their focus on Gold Loans and provide the same at extremely low interest rates.
  • Evolution of Technology – The evolution of technology has changed the way Gold Finance companies do business. With mobile phones at every hand and extremely cheap internet, 48% of Gold business of the second largest Gold Finance company has shifted online.
  • Gold Prices – Gold prices determine the value of the security pledged with the Gold Finance companies. Risks arise from any decline in the value of the security due to adverse decline in gold prices. On the other hand, a steep increase in the Gold prices leads to a higher safety cushion for lenders. It also enables borrowers to borrow a higher amount against the same article of gold. Historically, an increase in Gold prices has lead to much higher gold loan business.
  • Uncertain events – Unforeseen events such as COVID-19, Demonitisation have had adverse effects on the industry. Both such events have led to liquidity drying up, higher borrowing costs, higher defaults and uncertain futures.
  • Security Measures – Since a handle high volumes of cash and gold jewellery is handled by the companies, it becomes extremely important to have adequate security measures to avoid operational risks, including employee negligence, fraud, petty theft, burglary and embezzlement etc.

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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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