India is known to possess large stocks of gold, estimated at about 11 percent of global gold stock.

Over the past ten years, the value of gold in India has increased at a compounded average growth
rate (CAGR) of 13 per cent, outpacing the country’s real gross domestic product (GDP), inflation and
population growth by 6 per cent, 8 per cent and 12 per cent, respectively. India has one of the
highest savings rates in the world (34 per cent of GDP in FY10), of which the one third is invested in
gold. In India, gold prices increased by a staggering 180 per cent during FY06-FY11 and have
outperformed practically all known asset classes in the last decade. It is estimated that 10 per cent
of the country’s gold stock is pledged as collateral for loans. The gold loan market in India is broadly
classified into two categories, namely, organised sector and unorganised sector. Organised sector
primarily constitutes of formal institutions such as banks and NBFCs; unorganised sector includes
informal institutions such as private money lenders and pawnbrokers. However, the market share
between the unorganised and the organised sector is extremely skewed; approximately 75 per cent
is in the unorganised market (money lenders and pawnbrokers), and the remaining 25 per cent in
the organised market (specialised NBFCs and commercial/cooperative banks). The value of the
organised gold loan market in India is estimated at ` 400-450 billion, with a CAGR of approximately
40 per cent during FY02-FY10.

Conclusion

For borrowers, gold loans have emerged as one of the best means of raising quick, short-term
capital. Gold loans were preferred over conventional personal loans due to less procedures, fast
disbursement and easy instalments. The study shows that the respondents preferred gold loans
from the banks, and most of the respondents use the fund for their consumption smoothing.

Key benefits of gold loan

1. Avoids debt trap: A gold loan is settled either by repayment or, in case of default, by sale of the
pledged security. In the worst case, the borrower may lose his gold but there is no debt trap. 2.
Simple procedures, fast disbursal: The formalities in availing gold loans are minimal and procedures
are simple. In practice, the entire process should hardly take 15 to 20 minutes. This makes gold loans
ideal for the micro-finance segment where the loan amounts are small and where there is no point
in testing the borrower’s patience with an elaborate procedure. 3. No depreciation of underlying
asset: Unlike other secured loans, the underlying asset in a gold loan is not subject to depreciation.
At the same time, unlike land, it is a liquid asset and the transaction costs involved when enforcing
the security are minimal. 4. In practice, without recourse: Gold loans are effectively given out on a
‘without recourse’ basis. Defaults are settled by sale of the pledged gold and losses (if any) are
written off. There are no recovery agents to go chasing after the borrower and his other properties
with threats of legal action and court orders. 5. No questions asked: People often borrow money on
account of social compulsions which cannot be avoided in our cultural context; occasions such as
weddings, festivals and religious and social obligations. In gold loan, money is advanced solely on the
criterion of the value of gold pledged and questions about the purpose of the loan would only be to
confirm that anti-social or wildly speculative activities are not involved. 6. Suited for the unorganised
sector: Gold loans are ideal for those employed in the informal or unorganised sector and do not
have documents to prove their income. This is a segment conventional banks generally avoid
because their appraisal and credit scoring is based on formal documentation. Incidentally, more than
90 per cent of India’s workforce is in unorganised sector. 7. Gains for the wider economy: India has
the world’s largest stock of privately held gold with informed estimates ranging from 15,000 to
20,000 tonnes. When people borrow against gold (technically called ‘monetisation’), the impact is to
set in motion a whole new chain of economic activity