Digital offerings are transforming India's gold financing market

The gold financing sector in India is undergoing a considerable transformation in many aspects, from a gradual shift to the organised and formal sector to digitalisation and the emergence of online products. This is according to new analysis from Big Four accounting and advisory firm KPMG. 

Gold is a crucial commodity in the Indian market, one that not only holds financial longevity but also has cultural and social significance. The value of gold in India is perhaps best exemplified by the fact that, as KPMG reports, most gold consumers in the country hail from rural areas, where economic prosperity levels are well below average.

Gold’s popularity in rural areas remains unwavering, unlike the metal’s price and market capitalisation. What makes gold particularly valuable in these regions is its position as a ticket to financial inclusivity. Individuals that are otherwise deemed ineligible for credit can use gold as collateral to obtain a loan. These are known as gold loans.

Thereafter, these individuals have a credit record, which they can leverage for future financing. As a result, gold is a crucial part of India’s burgeoning microfinance environment. The commodity is popular in urban areas too, where a rapidly expanding middle class is in possession of growing pools of disposable incomes.

However, while the urban middle class can obtain a gold loan from major banking institutions, rural communities are often forced to look elsewhere for gold financing. In most cases, these other avenues belong to the unorganised sector, in the form of pawn shops or money lenders. 

According to KPMG's estimates, as much as 65% of gold financing in India takes place in the unorganised sector. Borrowing from the unorganised sector however may come with a degree of exploitation, primarily through exhorbitant interest rates. As a result, the ratio calls for a shift, which appears to be on its way.

While banks make up a large share of the organised lending sector, the rural organised gold loan market is mostly dominated by non-banking financial companies (NBFCs). A range of factors have contributed to the popularity of NBFCs. 

“Specialised gold loan NBFCs have consistently increased their market share in the market through aggressive investments in branding, promotions and geographic expansion. The enhanced brand value and geographic presence as a result of these investments have helped these NBFCS  to consolidate the market by capturing a large proportion new to market customers,” states the report.

Moreover, “these NBFCs have developed competitive strength in faster loan processing, accurate gold valuation, safekeeping and auctioning.” Experts have called for NBFCs to further evolve their practices in line with market trends, given that they provide a viable alternative to the unorganised sector.

One area where NBFCs have seen considerable development is in their online operations. Gold loans can now be processed and managed online through a variety of innovative mechanisms. While the primary beneficiaries of these products are urban youth between the ages of 25 and 40, this scenario might change in light of other dynamics. 

Online connectivity is making its way through rural India, giving a considerable boost to India’s overall online consumer base. By 2025, the Boston Consulting Group predicts that India will have as many as 850 million online users. It is expected to take some time before these users begin engaging with digital finance, although the products will be in place when that moment eventuality arrives.