Value Chain of the Gold Loan Industry – 10X10Y

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A value chain depicts the range of activities included to deliver a product or service to the customers. It helps you understand how value flows through the entire process from origination to the end.

To understand any industry, it becomes essential to understand who your suppliers are and who your customers are. On the other hand, it also becomes very important to understand who the suppliers are to your suppliers and who the customers are to your customers. Knowing what the value addition is, of every party to the value chain can become quite an exemplary intel to you as a researcher or to you as a businessman.

Mr. Radhakishan Damani the billionaire founder of DMART sure knows every aspect of the value chain from origination to then end, which is why he’s able to squeeze his suppliers and make extra-ordianary economic profit in an industry with wafer-thin profit margins.

However, a value chain of a service industry like BFSI would be vastly different from that of a manufacturing industry like Automobiles.

The value chain of an Automobile industry would start right from Raw Material manufacturers like the Steel Industry or the Paint industry, head to Auto Ancillaries like the Tyre Industry or the Battery Industry, heading to the Automobile manufacturing industry, who then process the finished product to the Retailing Outlet Industry to the customer. This would in the further steps also involve vehicle financers, vehicle insurance industry, the fuel retailing industry and then also the vehicle servicing and parts industry.

It would be interesting to see how the value chain sits for a service industry like Gold Finance.

To recall, Gold Loans companies provide personal and business loans secured by gold jewellery, or Gold Loans, primarily to 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.

With the evolution of the Gold Finance Industry over the last two decades, the value chain of the industry has also evolved drastically.

During the intial years of the industry the process of providing Gold Loans was totally done offline, but with the widespread usage of internet and netbanking, gold loans have majorily shifted online. The second biggest Gold Finance NBFC, Manappuram Finance Limited’s share of Online Gold Loans (OGL) in gold loan AUM was at 48% in FY20, up from about 39% a year back.

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So because of so much business shifting online it makes more sense to make two value chains, one each for offline and online.

The entire Gold Loan process is divided into three phases: Pre-disbursement, Post- disbursement and Release of the pledge.

Let’s begin with the old-school offline process –

(A) Pre-disbursement

  1. Customer Enquiry – This part of the Value Chain takes place prior to the disbursement of the Gold Loan. The origination is the entire value chain starts with the customer walking into the office for a Gold Loan. He could either be coming for the first time due to aggressive efforts of the marketing team or returning back for another loan due to the great service offered by the service team. But either way, the customer is in dire need of money.
    The needs of the customer regarding the loan amount and tenure are understood. Then, the customer is made well aware of the entire gold loan process, interest rates, repayment options, additional charges etc. The gold loan against the pledged gold jewellery is typically based on a fixed rate per gram of gold content in the jewellery, based on which the customer is told how much money he can borrow per gram of gold. This is mainly based on LTV and the gold prices.
  2. Appraisal of Gold – The next step in the process is the appraisal or evaluation of the gold to be used as security for the Gold Loan. Each of the branches has designated personnel for gold appraisal who operate under a clear policy regarding their function and responsibilities. The gold value is ascertained at 22 carat purity levels for a standard process. They can lend up to 75% of the 22 carat gold price based on 30 day average Mumbai Bullion Association price of 22 carat gold as per the recent RBI guidelines.
  3. Appraisal of the customer – Since the disbursement of the Gold Loan is primarily based on the value of the pledged gold, the customer’s creditworthiness is not a major factor in the loan decision. However, each branch complies with standard “know your customer” (“KYC”) policies and other customer appraisal procedures, depending on the amount of the Gold Loan. Gold loans are sanctioned only to genuine borrowers. Before sanctioning the Gold loan, the branch manager takes all precautions to ensure that the applicant, pledging the ornaments, is the owner of those ornaments and that the borrower is genuine. KYC requires PAN and an additional ID proof along with a bank account proof.
  4. Loan Approval – While the Gold appraisal is being performed, the customer fills the application process, which is then signed by the customer and the appraiser/staff. The pledge form is then printed, one copy is maintained with the branch, and one copy is handed over to the customer. The disbursement of the loan from the branches at this stage is immediate.
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B. Post – disbursement 

  1. Custody of the Pledged Gold – The pledged gold jewellery is packed separately by staff of the branch along with the relevant documents about the loan and the customer, and stored in the safe or strong room of the branch. Pursuant to the RBI Master Directions, the business of granting loans against the security of gold cannot be transacted at places where there are no proper facilities for storage/security of the gold jewellery.
  2. Inventory Control – Once the pledged gold is packed and moved to the safe or strong room, color coded stickers are affixed on the packet. Tamper proof stickers are also affixed on the jewellery packets to ensure inventory control.
  3. Branch Safety and Security Measures – Branch security measures implemented include Burglar Alarms, Security Guards, IP Cameras/CCTV, Joint custodianship of the key by the branch head and the assistant branch head, extensive rules in relation to the cash counter.

C.  Release of the pledge

  1. Collection and Recovery Process – Loan accounts and recovery of interest are monitored on an ongoing basis. Customer is intimated by means of short messaging service and phone calls in the event of defaults in repayment in a timely manner. In the event that a loan is not repaid on time and after providing due notice to the customer, the unredeemed pledged gold is disposed of by way of auction, on behalf of the customer in satisfaction of the principal and interest charges in accordance with the applicable RBI guidelines
  2. Closure or Renewal of Loan – Once the loan is fully repaid, the pledged gold jewellery is returned to the customer. The customer has the option to either renew the loan or close the loan. The customer also has an option to continue keeping the gold at the branch at their risk and expense and he would also have the liberty to avail loan against it whenever he wants without having to visit the branch again.
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Coming to the online value chain, which as mentioned before contributes to 48% of Manappuram’s business is somewhat similar to the offline process, except for the fact that it is extremely convenient for the customer and cost-efficient too.

(A) Pre-disbursement

  1. Customer Enquiry – The difference here is that, the customer rather than walking up to the offline branch, submits an enquiry online at the company’s website. The process looked something like this –
Step 1.
Step 2.
Step 3.
  1. I went through the process to understand first-hand how value-adding the process was. Within 2 hours, I got a call from their representative who explained me the entire process. On asking the details, I was told that the interest offered are 12% p.a. on gold loans taken online vervus 24% taking offline at the branch. What was interesting to hear was how on every other sentence his focus was on convenience. He mentioned that the I would have to pay regular monthly interests and can repay the principal whenever I want and I would be charged only for the those particular days.
  2. Appraisal of Gold –  On registering the request for the home loan, a staff from the branch would visit the customer’s residence with the necessary machines and immediately perform the appraisal of gold.
  3. Appraisal of the customer – The same representative would then require the customer’s PAN, and an additional identity proof to fulfill his KYC and create an online account.
  4. Loan Approval – An application would be filled then. And just like right then and there within minutes, the customer’s gold application is approved, processed and disbursed.The rest of the process remains the same as it was offline

It’s interesting to see how decades worth of habit change.

Thank You.

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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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