India's gold loan market set for rapid growth amid rising prices; unorganized sector holds 63% share: Report

The gold loan market in India is on the cusp of substantial growth, driven by rising per-gram gold rates and increasing customer demand. Currently, the market is predominantly controlled by the unorganized sector, which holds a 63 per cent share, while organized players, including banks and Non-Banking Financial Companies (NBFCs), account for the remaining 37 per cent, according to a PwC report.

This presents a considerable opportunity for organized players to expand their presence and capture a larger portion of the market.

Indian households are estimated to possess approximately 25,000 tonnes of gold, valued at around Rs 126 lakh crore. Despite this vast wealth, the existing gold loan market through organized channels is valued at just Rs 7.1 lakh crore.

With the market penetration of gold loans in India currently at only 5.6 percent, there is considerable untapped potential within household gold holdings. Although not all gold is available for pledging--due to factors such as religious significance, emotional value, or lack of financial need--there remains substantial opportunity for growth in the gold loan sector.

The gold loan market in India has historically been dominated by the unorganized sector. However, in recent years, organised players, particularly NBFCs, have begun to gain market share.

Banks, too, have been making inroads, especially through retail gold loans and a continued focus on agricultural gold loans. This shift is expected to continue as organised players leverage their formal lending structures, transparency, and customer trust to capture a larger share of the market.

Shaji Varghese, CEO, Muthoot FinCorp Limited, "Gold loan assets have been growing steadily and the potential to grow further is high since a major part of the country's gold loan market is still in the unorganized sector. Gold prices have been rising over the years. There is also a paradigm shift on how buying gold is perceived today. Traditionally gold was purchased for historical, cultural and societal reasons and while that continues, people have started buying gold as an investment and also as a convenient option to raise funds for financial requirements."India remains one of the world's largest consumers of gold, with total demand reaching 747 tonnes in 2023.

However, this represented a 3 per cent decrease compared to the previous year, primarily due to the surge in gold prices, which dampened demand for gold jewellery.

The price of gold in India increased from Rs 55,375 to Rs 66,532 per 10 grams (22 carats) between November 2023 and May 2024, prompting a shift towards lightweight or lower-carat jewellery items.

Globally, the demand for gold grew by 3 per cent in 2023, with China emerging as the largest market. The global market's expansion presents opportunities for Indian gold loan financiers to explore new avenues for growth beyond domestic borders.

Gold's relationship with the US dollar is a key factor influencing gold prices in India. A weakening rupee often leads to an increase in gold prices, as gold is priced in USD internationally. This dynamic drives higher imports and increases the cost of gold in rupees, further fuelling demand as investors seek a safe haven against currency fluctuations.

V.P. Nandakumar, Managing Director and Chief Executive Officer, Manappuram Finance Ltd, "Of late, the sharp increase in gold prices has imparted some stability to the gold loan book of most players and we do not expect gold prices to come down due to geo-political factors, the accumulation of gold by central banks as well as the lasting allure of the yellow metal."

The securitisation of gold through various financial instruments offers new avenues for gold loan players to diversify their offerings. By using gold-based security as collateral, established players can introduce new loan products that leverage the intrinsic value of physical gold. This approach not only diversifies their gold loan portfolio but also opens up opportunities for innovation in the gold loan ecosystem.