Project On A Study of Increasing Trend of Gold Loan by Manthan Jogani

A STUDY OF INCREASING TREND OF GOLD LOAN
PROJECT REPORT ON
“A STUDY OF INCREASING TREND OF GOLD LOAN”
MASTER OF MANAGEMENT STUDIES
SEMESTER __
2013
SUBMITTED
IN PARTIAL FULLFILLMENT OF REQUIREMENT FOR THE AWARD OF DEGREE
OF MASTER OF MANAGEMENT STUDIES
BY:
MANTHAN JOGANI
ROLL NO ________
Shri. Yashwantrao chavan shikshan prasarak mandal’s
SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

PLOT NO. 126, MAHADA COLONY, CHANDIVALI, MUMBAI-400072
1
UNIVERSITY OF MUMBAI
2013
PROJECT REPORT ON
“A STUDY OF INCREASING TREND OF GOLD LOAN”
MASTER OF MANAGEMENT STUDIES
SEMESTER __
2013
SUBMITTED
IN PARTIAL FULLFILLMENT OF REQUIREMENT FOR THE AWARD OF DEGREE
OF MASTER OF MANAGEMENT STUDIES
BY:
MANTHAN JOGANI
ROLL NO ______
Shri. Yashwantrao chavan shikshan prasarak mandal’s
SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

PLOT NO. 126, MAHADA COLONY, CHANDIVALI, MUMBAI-400072
2
CERTIFICATE
This is to certify that MR. MANTHAN JOGANI, Roll No. ____ has satisfactorily carried out the project
work on the topic “A STUDY OF INCREASING TREND OF GOLD LOAN”, for the __ Semester of
MMS, in the academic year 2013.
Place:- ________
Date:-________
________________ _______________
Signature of Examiner MMS Co-ordinator
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DECLARATION
I, MR. MANTHAN JOGANI student of MMS semester __(2013) hereby declare that I have
completed the project on “A STUDY OF INCREASING TREND OF GOLD LOAN” I
further declare that the information imparted is true and fair to the best of my knowledge.
SIGNATURE
(Mr. __________)
ROLL NO. __________
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ACKNOWLEDGEMENT
I hereby express my heartiest thanks to all sources who have contributed to the making of this
project. I oblige thanks to all those who have supported, provided their valuable guidance and
helped for the accomplishment of this project. I also extent my hearty thanks to my friends, our
co-ordinator, college teachers and all the well wishers.
I also would like to thanks my project guide Mr.PRAJEESH .K for his guidance and timely
suggestion and the information provided by him on this particular topic.
It is matter of outmost pleasure to express my indebt and deep sense of gratitude to various
person who extended their maximum help to supply the necessary information for the present
thesis, which became available on account of the most selfless cooperation.
Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which this project is given
consideration and was done with outmost seriousness.
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INDEX
Sr. No Contents Page No
CHAPTER 1
1.1 Preface 9
1.2 Executive summary 10
1.3 About the study 11
CHAPTER 2
2.1 Introduction 13
2.2 Background – Gold & Indian society 15
2.3 Gold through times 17
2.4 Gold economy 19
2.5 Demand & supply of gold 22
2.6 Gold market in India 24
2.7 Gold as an investment rationale 26
CHAPTER 3
3.1 Gold loan – basics 31
3.2 Rationale of gold loan 34
3.3 Gold loan growth 36
3.4 NBFC sector – outlook 37
3.5 Gold loan features 41
3.6 Gold loan sector 42
3.7 Major players 46
3.8 Gold loan process 48
3.9 Loan interest rate comparison across categories 50
3.10 Comparison of gold lender offering 51
3.11 Gold loan aids financial inclusion 52
3.12 Critical success factors for gold loan companies 54
3.13 Changing consumer perception driving India organized gold loan market 55
CHAPTER 4
4.1 Indiainfoline – A view 58
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4.2 Services 61
4.3 Financial product distribution 66
4.4 IIFL gold loan 84
CHAPTER 5
5.1 Research & study 87
5.2 Findings & analysis 88
5.3 Case study 120
5.4 Case study 122
CHAPTER 6
6.1 Risk to borrowers and lenders 126
6.2 Regulatory environment 127
6.3 Conclusion 129
6.4 Bibliography 131
6.5 Annexure 133
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CHAPTER 1
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1.1 PREFACE
I have great pleasure in presenting my project to the Mumbai University. My topic is “A Study
of Increasing Trend of Gold Loan”. I have made sincere efforts to make this project informative
and I am sure it would justify the same.
I’m deeply elated to carry out my project on study of Gold Loan. The project gave me an
opportunity to study various aspects related to Gold Loan. It was a good learning experience
throughout and it will certainly benefit the readers too. I am quite assertive that my project will
help the students of Mumbai University.
My project covers the basic knowledge of the Gold Loan System in India, which is essential to
understand how Gold Loan system works and how Gold Loan has developed in our country to a
great extent in the present age due to technical advancements.
Different types of Gold Loan, Different types of Gold Loan companies, Procedures and
Recovery System related to Gold Loan and so on has been covered in the project.
Through this project I have tried to find out the increasing trend of Gold Loan. My topic will
definitely help the researchers who want to research on projects related to Gold Loan.
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1.2 EXECUTIVE SUMMARY
In India, gold is as much a thing to be possessed as it is a concept. The word ‘gold’ in the ancient
texts has wide meaning and connotations, ranging from the mundane to the sublime. In the
Sanskrit language there are at least seven synonyms for gold, viz. Swarna, Suvarna, Hiranya,
Kanak, Kanchan, Hem and Ashtapada. Gold in India serves many functions and wearing it has
several implications.
At the most obvious level, it is a form of adornment, and also a status symbol. For Hindus, gold
is associated with most religious ceremonies, such as the naming ceremony or marriage. To
signify marital status, Hindu women wear a special kind of necklace, which consist of gold
pendants strung in a certain combination with beads made up of other materials. In certain parts
of the country a goldsmith pierces a newborn child’s ear with a gold pin in a ritual performed
twelve days after it is born, often only in a symbolic manner though.
The Indian epics, such as Ramayana and the Mahabharata are replete with descriptions of
ornaments. Practitioners of traditional medicine in India claim that pure gold has several
therapeutic qualities: when consumed regularly, gold is good for circulation of the blood and
enhancement of the mind and lifting the spirit; gold applied to skin helps combat ageing. These
claims, however, are not supported by modern medical science.
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1.3 ABOUT THE STUDY
“A Study of Increasing Trend of Gold Loan” basically aims at the concepts of Gold Loan. Gold
Loan has attained importance in the present age due to technical advancements over other kinds
of loans. The project focuses on the procedures of Gold Loan and various companies offering the
same. It also throws light on the drawbacks of it. The period between the evolution of Gold Loan
in India to the current leading stage has also been summarized. It also gives brief information
about different types of Gold Loans and its authenticity in comparison to other financial loans.
Objective
1. To know the concept of Gold Loan in India
2. To analyze the impact of Gold Loan in Indian Economy
3. To understand about what makes Gold Loan score over other sources of funding
4. To analyze and compare Gold Loan with other category loans
METHODOLOGY
Primary data:
My primary data was collected through Questionnaire, Face to Face communication with some
gold loan companies as well as with some public investors. I have visited some Gold Loans
Companies in and around the vicinity of Mumbai for collecting primary data.
Secondary data:
My secondary data was collected from the Websites, Magazine, Books, Newspapers, Daily
Periodicals.
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CHAPTER 2
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2.1 INTRODUCTION
Gold, because of its ability to protect the wealth of investors can be an ideal addition to a
portfolio. Also the short-term fluctuations in Gold offer good potential for trading. Gold has been
on its long-term upwards trajectory which began in early 2001. This long-term move has been
punctuated by short-term pullbacks offering opportunities for late entrants to join the
bandwagon. With the US economy outgrowing the league of developed nations during the last
two years coupled with the worsening of long-term structural weaknesses and the subsequent
movements in the USD have moved the focus away from Gold’s use as a commodity. However
the long-term fundamentals of the yellow metal have also undergone a significant change with
the mining output falling quite steadily during the last decade coupled with an evergreen demand
especially from Asia.
Gold has long been a valued commodity, particularly in India where it is considered auspicious,
and has been in use for centuries in the form of jewelry, coins and other assets. Though gold is a
highly liquid asset, it wasn’t until recently that consumers leveraged it effectively to meet their
liquidity needs. Lenders provide loans by securing gold assets as collateral. Compared with the
rest of the world, in India the gold loan market is big business. Until a decade back, most of the
lending was in the unorganized sector through pawnbrokers and money lenders. However, this
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scenario changed with the entrance of organized sector players such as banks and non-banking
finance companies (NBFCs) which now command more than 25% of the market.
The organized gold loan market has grown at 40% CAGR from 2002 to 2010. NBFCs have been
a major driving force behind this growth given their extensive network, faster turnaround time,
higher loan-to-value ratios and the ability to serve non-bankable customers. Of late, banks have
improved their gold loan product features and services. Coupled with comparatively lower
interest rates and charges, banks stand to gain market share at the expense of NBFCs in the near
future.
With rapid growth, regulatory scrutiny has increased on gold loan lending practices. NBFCs are
under greater focus as a result of their higher interest rates and charges, and non-adherence to
know your customer (KYC) regulations. This may further impact the dominance of NBFCs in
the gold loan market.
At just 1.2% of the total gold stock in the country at present, gold loans have a huge growth
potential. However, firms need to develop distribution, product and risk mitigation strategies to
get a share of the pie in a profitable and sustainable fashion.
Indian households typically have an emotional attachment and sense of personal belonging to the
gold they own, which is usually in the form of jewelry, coins or bars. Thus, gold owned by
Indian families is rarely liquidated unless in extreme financial need — consequently, monetary
value of a gold investment is rarely realized. But, pledging gold ornaments and other gold assets
to local pawnbrokers and money lenders to avail loans has been prevalent in the Indian society
for many decades, particularly in rural areas. However, over the past decade, the organized sector
– banks and NBFCs – have taken the lead. The urban populace is also beginning to realize the
potential value that can be realized through gold loans, which has led to rapid growth of the gold
loan market in India.
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2.2 BACKGROUND – GOLD & INDIAN SOCIETY
Gold is a very solid asset. Buying physical gold does have advantages compared with other
investments. Investments in gold-backed financial products and paper gold should be left up to
the professionals. Gold is the oldest precious metal known to man. Therefore, it is a timely
subject for several reasons. It is the opinion of the more objective market experts that the
traditional investment vehicles of stocks and bonds are in the areas of their all-time highs and
may be due for a severe correction. To fully appreciate why 8,000 years of experience say " gold
is forever", we should review why the world reveres what England's most famous economist,
John Maynard Keynes, cynically called the "barbarous relic."
Why gold is "good as gold" is an intriguing question. However, we think that the more pragmatic
ancient Egyptians were perhaps more accurate in observing that gold's value was a function of its
pleasing physical characteristics and its scarcity.
 Gold is primarily a monetary asset and partly a commodity.

 More than two thirds of gold's total accumulated holdings account as 'value for investment'
with central bank reserves, private players and high-carat Jewellery.
 Less than one third of gold's total accumulated holdings is as a 'commodity' for Jewellery in
Western markets and usage in industry.
 The Gold market is highly liquid and gold held by central banks, other major institutions and
retail Jewellery keep coming back to the market.
 Due to large stocks of Gold as against its demand, it is argued that the core driver of the real
price of gold is stock equilibrium rather than flow equilibrium.
 Economic forces that determine the price of gold are different from, and in many cases
opposed to the forces that influence most financial assets.
 South Africa is the world's largest gold producer with 394 tons in 2001, followed by US and
Australia.
 India is the world's largest gold consumer with an annual demand of 800 tons.
Gold has traditionally been among the most liquid assets and is an accepted universal currency. It
has traditionally been consumed by individuals in the form of jewelry, especially in India where
it is considered auspicious. Gold is presumed to be a safe haven in times of economic
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uncertainty, a fact exemplified by a 30% increase in the value of gold over the past year. India is
one of the largest markets for gold, accounting for approximately 10% of the total world gold
stock as of 2010. Rural India accounts for 65% of this gold stock. Though gold prices have
increased at more than 19% CAGR from 2002 to 2012, gold stock in India has grown at 22%
CAGR during the same period to 18,000 tons (Rs. 32,000 billion)
The demand for gold has followed a regional trend with southern India accounting for 40% of
annual demand, followed by the west (25%), north (20-25%) and east (10-15%).
The above figure depicts 6462 bn in 2009, 11669 bn in 2010, 25000 bn in 2011 and 32000 bn in
2012
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2.3 GOLD THROUGH TIMES
Though the ancient dream to brew gold by artificial means was never materialised, the
admiration for the gleaming metal never parted with the culture and tradition of the Arab people.
Many centuries later, the love for gold would produce effects the alchemists would have only
dreamed about. A modern proof of this, the Dubai Gold and Diamond Park, this luxurious
variant of a gold souk is the latest addition to the venue of the visually pleasing metal. Just off
the highway between interchanges 3 and 4 on Sheikh Zayd Road, its Arabic style façade seems
not too different from many others around. Enter inside however, and an array of exquisite glitter
strikes the eye. A multitude of jewellery shops exude a delicate sparkling display, reinforcing
Dubai’s image as a leader in the industry of gold. The City of Gold, as the emirate markets itself,
has become an established trademark. But what is in gold that renders it supreme to have such a
modern city proudly make it its symbol?
Gold’s Glowing History

The oldest precious metal known to man, gold’s gleaming texture caught his attention in the
earliest of times. No one can quite determine the date of mankind’s first encounter, and
consequent obsession, with the fascinating metal. Artefacts found in Spanish caves suggest
Paleolithic man used it as far back as 40,000 BC. Discoveries of more recent epochs reveal gold
was a symbol of divinity, royalty, and beauty throughout history. The making of jewellery from
gold can be traced into history some five to six thousand years ago. Chains, rings, earrings, and
all sorts of charms have been part of divine and royal life enhancement. Highly malleable, the
precious metal was easily workable, ensuring a relatively smooth moulding process. The great
ancient civilizations developed skilful gold artistic traditions. Pharaohs used the relic metal for
beautification in ancient Egypt. Greece and Rome too, produced a splendid legacy of golden
treasures. Likewise, in eastern civilizations such as those in China and India, gold has been made
into articles of ornamentation and into religious icons. Later, during the middle Ages, the metal
found widespread use in Europe for crosses, altars, doors, chalices, and reliquaries. Then came
Columbus's discovery of America, which opened an era of gold production the world had not
seen to that time. It prompted many to leave for the new world in search of golden riches. A few
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hundred years later, history witnessed the most famous gold craze in the California gold rush of
1848.
Today, nearly half of the world's gold is kept by governments and central banks. All countries
still regard it as a medium of international payment. Its inimitable virtues have made it the sole
stuff accepted globally in exchange for goods and services. In the form of coins or gold bars,
gold has been used as a high-denomination currency. It backed paper-currency systems when
they became common in the 19th century, and from the 1870s until World War I gold made the
basis for the world's currencies. After 1980, gold's formal importance in the international
monetary system became obsolete, but the metal is still greatly valued as a reserve asset.
The presence of gold has indeed made a remarkable impact on the human psyche. Freud, father
of psychoanalysis, would argue that our interest in gold has to do with the erotic fantasies of
early childhood. A less ambitious presumption simply maintains that the passion for gold comes
from the combining of visually pleasing features with scarcity. Indeed, gold is so rare that world
steel production for one hour is more than all the gold ever found. The effect of gold is also built
up due to its permanence, as virtually all of the yellow metal ever mined is still in existence.
Putting it all together, gold is the only precious metal to provide shimmering beauty, high
malleability, rarity, and virtual indestructibility. No wonder the passion for gold has been
verbalised in the famous saying, “More men have been knocked off balance by gold than by
love!”
"He who hold's the Gold makes the rules ...

because any ol' idiot can print paper".
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2.4 GOLD ECONOMY
“The story of gold has a deeper message, one that has none of the transitory qualities of what we
choose to use as money. Seen in this broader sense, the story of gold has no ending.”
-Peter Bernstein in “The Power of Gold”
In India goldsmiths are usually men, and are referred to by a variety of names depending on the
region. In the Vedic period (Second Millennium BC), goldsmiths had a much higher standing in
society than most other artisans, probably because they worked with a precious metal. The
goldsmiths enjoyed royal patronage. Historical evidence suggests that Indian jewellers had early
mastery of the various skills required to make fine jewellery, such as mixing alloys, moulding,
setting stones, inlay work, relief, drawing gold and silver into fine wires, plating and gilding. The
duties of the goldsmith have been defined in an ancient social code, but are observed more by
breach than by adherence. There is hardly any village or town, even in the remote corners of the
country, where there is no goldsmith.
Today, the gold/jewellery industry is fast-growing, with impressive domestic and export sales.
Gems and jewellery constitute one of the fastest growing export sectors in India, accounting for
one-fifth of the aggregate exports. The current size of the gold economy is around US$ 6 billion
and employs over half a million people. The number of gold jewellery manufacturing units is put
at 100,000. Also, a large number of skilled goldsmiths/gold merchants from India are engaged in
gold trade and industry in almost all the oil-rich Middle Eastern countries.
However, for a long time in the existence of the gold economy, the producers and consumers of
gold jewellery hardly found a place in any policy discussion on gold.
Gold Accumulation
How much gold is there in India? This is a quintessential question, but the answers are many. For
reasons obvious in a country of continental dimension, it is not feasible to collect direct data by
way of census to get a handle on the stock held, particularly by private households. The official
estimate puts the figure at around 9,000 tonnes, although much higher estimates range between
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10,000 and 15,000 tonnes. The global stock of gold being estimated around 145,000 tonnes, the
share of gold held in India would fall in the range of 7% to 10%.
The story of gold accumulation in India is as old as history itself. This is certainly not something
unique to India - many of the ancient civilizations exhibit this feature. What is truly unique about
India is the fact that at no time in history has India mined any substantial quantity of gold. In
some old Greek texts, one can find reference to certain tribes in western India procuring sizeable
gold from sandy deserts to finance war efforts. The current gold production per annum is around
2 tonnes. One of the gold fields in southern India operated by the state-owned Bharat Gold
Mines Ltd (BGML) at Kolar has - Asia’s oldest and deepest mines. This particular gold field is
known more for its contribution to particle physics than for its volume of production, past or
present: the conclusive evidence that sub-nuclear zero-mass particles in cosmic rays called
Neutrinobombard the earth was found in experiments conducted in its deep pit. Some have
sought to explain the process of accumulation of gold in India in terms of cultural factors alone,
but there appear to be very strong economic underpinnings for this phenomenon:
India has enjoyed a continuously favourable balance of trade for eight centuries spanning the
first and the second millennium AD, enabling it to import precious metals. The inheritance laws
in the Mughal period (1500 AD to 1850 AD) provided strong incentive for gold accumulation,
particularly by the wealthy. Simply put, under the Mughal legal system, on the death of a person,
the estate left behind would first compulsorily be vested in the state. The legal heir of the
deceased would thereafter approach the state to gain the inheritance, which would be granted at
the discretion of the authorities, on payment of duties to the state and possibly inducements to
the officials concerned. This system engendered two obvious consequences:
 Conspicuous consumption by the wealthy and rich
 The tendency to hide wealth from the eyes of the authorities
Gold, silver, diamonds and precious stones provided the means to convert savings into the most
concentrated and indestructible form of wealth. This also facilitated easy and hassle-free transfer
of wealth from one generation to another without state intermediation. The resulting historical
experience of Indians has been deeply ingrained in their psyche. No wonder, the same tendency
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with regard to conversion of savings into gold is observable in good measure even now, although
the law and the institutional mechanism surrounding savings and wealth are very different.
In the Hindu, Jain and Sikh community, where women did not inherit landed property, gold and
silver jewellery was, and still is, a major component of the gifts given to a woman at the time of
her marriage. Jewellery, because of its easy convertibility into cash, is regarded as secure
investment. Even among the nomadic and tribal communities, gold and silver jewellery are
regarded as investment and identity markers.
For very poor people, gold can be held on the person for 24 hours a day, which eliminates safety
concerns and also facilitates fleeing in distress. Gold can be mortgaged or sold in crisis.
The advantage of gold vis-à-vis other financial assets is that at times of uncertainty the liquidity
of gold actually increases.
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2.5 DEMAND & SUPPLY OF GOLD

 India is one of the largest markets of gold accounting for nearly 10% of total world stock
with 18,000 tonnes of gold
 Value of gold stock in India has grown at 22% CAGR from FY02 to FY12
 Price in-elasticity: Despite increase in gold prices from Rs. 15,026 to Rs. 51,150 per ounce
between 2002 and 2012, the demand for gold remained relatively stable at around 700 tonnes
 Rural Concentration: Rural India is estimated to hold 65% of the gold stock
 Southern India is the largest market accounting for 40% of India’s gold demand, followed by
West at 25%, North at 20-25% and East at 10-15% of annual Gold demand
To explain the ever-increasing demand for gold in India, various hypotheses have been put
forward from time to time:
 Demand for gold has an autonomous character. Supply follows demand.
 Demand exhibits income elasticity, particularly in the rural and semi-urban areas.
 Price differential creates import demand, particularly illegal import prior to the
commencement of liberalisation in 1990.
 A part of the demand is caused by the need to stash away unaccounted wealth/income.
Gold demand in India increased by an annual compound rate of around 15% from 1990 to 1998
during the period of liberalisation, with growth slowing thereafter. This was high, not only vis-à-
vis the world demand growth rate of 3.05%, but also in relation to the trend Indian GDP growth
rate (5.5%) and the growth rate of demand for oil (3.8%), energy (6%) and sugar (5%), which
exhibit high income elasticity. Equally striking has been the shift from smuggled to official
imports. Gold Fields Mineral Services Ltd (GFMS) estimate that in 1992 smuggled imports
accounted for 115 tonnes, over one third of total imports of 320 tonnes. In 1998, smuggled
imports were estimated by GFMS at 56 tonnes, just 8% of the total import of 718 tonnes. Taking
the gold import per year in the beginning of 1950s at around 90 tonnes, the long-term compound
growth rate of import in the 51-year period (1950-2001) turns out to be 3.8%. In the recent past,
yearto- year distribution of imports among official and smuggling channels responded to customs
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duty variation. Smuggled imports appeared to rise again after duty was increased in the 1999
budget but fell back after the duty was reduced again in the 2001 budget.
By value, gold import is the second most important item of import after fossil fuel. Since 1997
there have also been changes in the form of official imports. Since the commencement of the
non-resident Indian (NRI) route for import in 1991, there was criticism of this arrangement on
the ground that most of the gold imported in this manner does not represent genuine
earning/savings of the returning non-resident Indians. It was alleged that funds for this type of
import, which thrived on account of differentials between domestic and international prices, were
provided by diversion of foreign exchange resources of the country through the underground
market (hawala).
There may be an element of truth here. But, in any event since the introduction of the restricted
OGL arrangements in 1997 the imports of gold under NRI has effectively dried up. Gold
imported officially for domestic use is now channelled almost exclusive via the official agents or
the authorized commercial banks
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2.6 GOLD MARKET IN INDIA

The gold market in India is predominantly a market for buying and selling physical gold. In the
wholesale segment, nominated agencies are the bulk importers. This market is reasonably
efficient from the point of view of distribution of bars and scraps over the length and breadth of
the country, which takes place in a very effective manner. Price uniformity is also generally
observable in areas with identical incidence of duties and tax. In the market for ornaments and
jewellery, consumer protection is still not assured, although it must be admitted that this has
received much policy attention in the last few years. It is customary even now for the well-to-do
in India to buy jewellery items abroad for better quality assurance. It is a well-known fact that
cheating on caratage (fineness) is widespread. In April 2000, the government introduced
voluntary hallmarking of gold jewellery through the Bureau of Indian Standards. However, the
progress in this regard has been slow so far, with only about 335 jewellers having accepted the
necessary certification with most of them having only partial stocks of their jewellery
hallmarked.
Also, there are only 11 assaying and hallmarking centers in the country. Gold lending/leasing
volumes are small in comparison to physical buying and selling. Most of the leasing activities are
undertaken by nominated banks on a back-to-back basis via supply from overseas. Domestic
lending resources are still meagre, as mentioned before. This segment of the market needs to
develop for at least two reasons:
To provide working capital at low cost together with gold price hedging, not only to the
exporters but also to jewellery manufacturers for the domestic market. At present, non-exporters
do not receive the necessary working capital finance in rupees from the banking system. The
evidence of the significant contribution made by the spread of gold leasing, even to small family
jewellery units, in boosting exports and local sales in Italy could provide guidance in the matter.
The existence of a gold lending/leasing market is a pre-condition for arbitrage-free pricing of

gold forward/swap contracts in the local market. Enhancing lendable gold resources by banks
will be a major challenge. Innovative deposit products, backed by effective marketing strategy,
will be the key. However, the response of households is likely to be slow.
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There is at present no legal obstacle to forward trading in gold by the nominated banks. It is hard
to guess if and when the general ban on forward trading in gold will be lifted, but if the recent
lifting of the ban on forward trading in agricultural commodities is any indication, it is possible
that the measure will be extended to gold in the near future. There is a history of active gold
futures markets operating in India from the end of the First World War until the imposition of the
ban on forward trading in gold in 1962.
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2.7 GOLD AS AN INVESTMENT RATIONALE

For thousands of years, gold has been valued has a global currency, a commodity, an investment
and simply an object of beauty. As financial markets developed rapidly during the 1980s and
1990s, gold recorded into the background and many investors lost touch with this asset of last
resort. Recent years have seen a striking increase in investor in gold. While a sustained price
rally, underpinned by the fact that demand consistently outstrips supply, is clearly a positive in
this resurgence, there are many reasons why peoples and institutions are once again investing in
gold. Individuals have used gold as store of wealth and as insurance against the fluctuations and
depreciation of paper money and other macroeconomic and geopolitical risks. Perhaps no other
market in the world has the universal appeal of the gold market.
Successful investing is about the diversification and management risk. In layman’s terms this
means not having all your eggs in one bucket. We know from history that markets can and do
crash and if you are not diversified your entire nest egg can wiped out. So a healthy portfolio
includes a wide range of assets including a variety of equities with exposures to different markets
sectors and regions; a variety of different countries ‘bonds; a diversified property portfolio ; a
cash component and a 5-15% allocation to gold – related investments and gold bullion .the key is
to determine what amount of each asset class to have in a globalized and increasingly integrated
global economy, a portfolio should be compiled based upon current global macroeconomic
fundamentals.
While Indians are by far the largest natural buyers of gold, we tend to have a major preference
towards gold jewellery when compared to some of its other forms. While these jewellery no
doubt hold a high emotional and intrinsic value in the world, they are not the smartest way to go
in terms of investments. The main reason for this is one: the uncertainty of quality and two: the
high additional cost incurred for the making, which in terms of an investment is pretty worthless
if not harmful to the value of gold.
The other options like buying gold coins or bars also pose a problem of quality, authenticity,
storage and even insurance, which increases the cost of the asset greatly.
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While banks, which sell gold, cut out some of these problems, the insurance issue still remains,
as well as the fact that banks do not buy back the gold they have sold.
This leaves purchasers with a relatively illiquid form of gold, which then has to be independently
sold to either a jewel shop or another buyer. All in all, this brings us to gold exchange traded
funds (ETF’s), which tend to take away the hassle of storage and insurance both, since the gold
is stored and insured by the asset management company (AMC).
The gold is also supposed to be authenticated and quality tested, providing investors a chance to
invest easily into this asset by merely purchasing units. These units are like shares and change in
value as the NAV moves up or down.
The only downside is the psychological edge of owning psychical gold on your own is not there,
unless the units are redeemed via the fund.
The reason one may prefer gold ETFs over other forms of gold buying is as when compared, one
finds, banks don’t buy back the gold they sell, gold coins and bars are harder to store and verify
for authenticity, jewellery is more expensive due to the making charges, leaving gold ETFs as
the preferred choice of investment.
Why gold?
Gold as such does well when there is high risk aversion in the market and till that scenario exists,
gold will remain attractive. While currently, gold may not be reacting to every asset class like it
usually does, having a negative correlation to equities, debt and having a positive correlation to
oil, in another two to three years it will normalize. Gold will then continue to act as a hedge
against inflation, falling equities and currencies.
While the gold high maybe over, it still remains a powerful asset class and until the world
economy stabilises and risk aversion settles down, it will not be bogged down.
Most investors would be aware that gold is a good hedge against inflation and the best insurance
against the markets. However, people may find it odd as to why are we discussing inflation when
or falling equities when the markets are looking attractively priced right now. This is mainly due
27
to the high risks that many nations are taking today, be it via offering huge stimulus packages as
seen in the US or via increasing their fiscal deficit as seen in the case of India. If either of these
scenarios play out, the governments will be left with little choice but to print more money,
thereby creating inflation and destabalising the economy as well. In such circumstances, inflation
is bound to kick back in and sooner or later, investors will once again have to turn to gold for
solace.
On elaborating as to why is gold so essential during the present circumstances, Arvind goes on to
explain, “While the world economy is facing a major crisis, right now people need protection. So
many countries these days are offering stimulus packages, which mean these governments, in
order to raise the money for the stimulus packages, will start printing more money. This will
debase the currencies and in such times gold is the best protection one can have.
However, these three reasons to invest in gold:
Growing Global Demand

Despite the worldwide economic slowdown, the huge
emerging economies of China and India are consuming ever
greater quantities of gold and silver. Consequently, the
demand for these precious metals is experiencing explosive
growth, which in turn drives up their price. These economies
are only in their infancy, promising that this trend will
continue into the foreseeable future.
Not Linked to Currency

Our national debt is already several times our Gross Domestic Product (GDP) and has severely
weakened the dollar, which is not backed by any tangible asset. While the value of paper assets
is tightly linked to that of the dollar, the value of a gold investment is independent and universal.
Invest In Gold to Counter Declining Stocks

Although interest rates are at historic lows, eventually the government will be forced to raise
them to counter inflation. As interest rates go up, so does the cost of money. The higher cost of
28
money means corporations have less money to invest, driving down the value of stocks and
bonds. History shows us that the value of gold always reacts to counter the declining value of
stocks and bonds
Other reasons:
 Gold is a weapon against inflation. The value of money becomes less and the value of gold
becomes high in the period of inflation. People can invest their money for getting this future
benefit
 Government can introduce currency at the time of redemption of loan, gold can not be
created
 If we compare the rate of gold to rates of various companies’ shares in
 American market, it is observed that gold is cheaper than equity shares
 The investment in gold is profitable when there is a tremendous change in economic and
social activities. But in this period gold becomes dearer and the rates of other properties
become lower
 The investment in gold helps in maintaining our portfolio under control
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CHAPTER 3
30
3.1 GOLD LOAN – BASICS
What are gold Loans?

Many people have assets such as gold ornaments and jewellery that earn no income because they
lie idle at home or in a locker. If you are in need of a loan, and if you are confident of your
ability to repay the loan on time, you can unlock the value of these assets by taking a loan against
gold. You offer the lender your gold. The lender gives you a loan against your ornaments after a
quick evaluation of its purity. The lender will usually not give you the loan up to the full value of
the loan, but generally you can get up to 80% of the value. You pay interest on the loan. At the
end of the loan, you repay the loan and can take your gold back from the lender.
How can I get a gold Loan?

You can get a gold Loan through either your bank or through a non-banking company that
specializes in loans against gold. If you go to a bank like HDFC or ICICI, you will be asked to
produce back-up documentation related to your ID and other personal details. The process, as
advertised, can take up to 1 hour. You might need to prove that the gold is owned by you. If you
go to a non-banking company such as Muthoot or Mannupuram, the process can be as quick as a
few minutes according to what these companies advertise. The documentation required is usually
less than what banks will demand. Because the process is less rigorous, especially because these
lenders do not review if you have creditworthiness, they charge a higher rate of interest than the
banks.
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What are the features of gold loans?

 Secured Loan: Gold loans are secured loans – you are borrowing against the security of your
gold that you give to the lender and in return for which you get the loan.
 Purpose: You can use the loan towards any purpose, as long as it is not for any illegal activity
or for speculation in the stock market. Non-banking companies have even fewer restrictions
on what you can use the loan for.
 Interest Rate and Charges: Banks are currently charging approximately 12.5% interest for
whatever tenure you take the loan for. They usually have a processing fee for the loan as
well. Non-banking companies have 30-60-90 day and other schemes where the rates of
interest can be approximately 2%+ per month.
 Annually, this works out to be about 27% per annum, which is a very high rate of interest.
Non-banking companies usually don’t have a processing fee for the loan.
 Loan Amount: Lending can start at amounts as low as Rs 25,000, but some banks can lend
you anywhere from Rs 10 lakhs up to Rs 75 lakhs, depending upon the value of your gold.
The non-banking companies usually deal in much smaller loan amounts because they often
cater to a different kind of customer base. None of these two types of lenders charges an
evaluation fee for your gold.
 Repayment Terms: Banks usually have terms that run from 3 to 12 months, but you can
prepay at anytime. At non-banking companies you can choose the term that you want, and
accordingly select the loan that suits you.
Are gold loans advisable? What are the alternatives?

Gold Loans can be a quick way to get a loan against the security of your ornaments. This is
particularly true if you might not have any credit history. As with all loans, only take them if you
confident of your ability to repay the loan back to the lender on time, otherwise you will face
charges and penal interest. Don’t take a loan if it’s purely for consumption purposes like buying
a new fashion accessory or cell phone. You won’t have an asset to show for it at the end of your
consumption. Personal Loans are one alternative to gold Loans, however they can be more
expensive than gold Loans and will often come with restrictions on your ability to pre-pay the
loans.
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Do I face any risk that gold prices will move up or down?

As you have probably seen in the media, gold prices are at an all time high (in nominal terms),
and are expected to go higher. However, you face no risk if there is a price movement during the
time your loan is outstanding. As long as you pay your loan back on time, you will get your gold
ornaments back, exactly in the same state and weight that you gave at the time you took a loan.
Typically, your gold is safe with the lender. Most of these lenders come under strict regulatory
supervision from the RBI. Go with a lender that has been around for a while, not just any upstart
lender.
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3.2 RATIONALE OF GOLD LOAN

Convenience:
The sheer convenience of a loan proposition against such a liquid asset suits both the lender and
the borrower. In some cases, it may be the last resort for the client, but it is a convenient one.
Lenders find it a timeless, good business model, while clients, who need money quickly, find this
the best way to raise funds.
Low Interest Rates:

Borrowing against gold is fast emerging as the most preferred financing option as the interest
rate charged by institutions are less compared to other retail loans such as personal loans. For
instance, the rate of interest on these loans is between 13% and 24% per annum. In comparison,
personal loans charge 16- 26 % per annum, depending on the credit profile of the borrowers.
Secured:
It is better to take a loan against gold than a personal loan as the rates are lower—since this type
of loan is secured.
Flexibility:
Most banks/NBFCs allows to pay only the interest on the loan monthly and the principal
payment at the end of the term and not as an EMI; which works better from an interest
perspective.
Fewer Documents:
Borrower can decide the approximate loan amount based upon his/her gold value, i.e. no income
proof is required unlike in a personal loan where the loan amount is decided based on the income
proofs provided. The processing of the loan is also much faster because of easy documentation.
Banks such as ICICI Bank and HDFC Bank may ask for ID and other personal details which can
take up to an hour while non-banking finance companies such as Muthoot Finance or
Mannapuram Finance claim to process the loan in a few minutes.
Opportunity:
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Instead of keeping gold idle in a locker at home or in a bank’s locker, it is a good idea to borrow
against it at lower rates in comparison to other retail loans. Moreover, lenders also prefer this
route of financing as the default rate is negligible. In general, the loans may be provided for up to
95 % of the value of gold. Added to these is the fact that pledging gold is no longer considered a
taboo and disgraceful in Indian society. This explains why gold loans are now widely recognized
as acceptable means of raising funds for meeting urgent requirements by all segments of society.
Some people also go for it because they find it more private than going to a neighborhood
moneylender. Also, with gold prices soaring, even banks have begun to push customers toward
gold loans. The transactions have become more popular as small personal lending dries up
because of rising defaults on risky loans.
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3.3 GOLD LOAN GROWTH

Gold loan is a loan provided against the pledge of gold ornaments. It’s the most convenient way
to receive cash in no time from any bank/ NBFC by pledging gold ornaments/ coins/ bars. This is
one loan product which comes with minimal documentation & no processing time in short it’s
over the counter product. The organized gold loan market in India pegged at 25,000 crores and
is expected to grow at an annual rate of 35-40 % over the next three years to reach a portfolio
size of Rs. 50,000 – Rs. 53,000 crores by FY15. In last four years is a tremendous scale-up.
That’s the power of gold at work. With banks not too happy about lending against
unconventional assets and with microfinance institutions in the doldrums, loans against gold
have taken off like a rocket.
In the past few years, companies specializing in lending against gold have been in overdrive, as
Indians have a collective gold hoard of 15,000 tonnes, of which less than 5 percent is in
government hands. Icra Management Consulting Services estimates that the total gold loan
market is worth $8 billion (Rs 36,000 crore) and it grew at a compound rate of 40 percent by
2015.
The market is currently skewed towards the South which accounts for 90 percent of gold loans.
Manappuram has 75 percent of its branches there. Its growth came through a 79 percent
expansion in branch network and a doubling of the employee headcount. A sustained rally in
gold prices also played a critical role in swelling the loan book, two qualified institutional
placements in this growth.
The major risks in this business include volatility of gold prices, and regulatory challenges posed
by the Reserve Bank of India. Non-banking financial companies have recently been left out of
the definition of priority sector lending, which means they cannot access loans from banks as
cheaply as they used to before. Institutions offering gold loan are banks (public and private),
cooperatives and NBFCs. To name a few leading financers are Muthoot Finance, Mannapuram,
Neelachal Gramya Bank (NGB), HDFC bank, SBI & its associates, Andhra Bank, ICICI Bank &
many more.
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3.4 NBFC SECTOR - OUTLOOK

The Indian NBFC sector can broadly be segregated into as below:
 Infrastructure NBFC segment
 The Housing Finance NBFC segment
 The Retail or Consumer Finance NBFC segment
The Indian Non Banking Finance Companies (NBFCs) accounts for a critical part of the
country’s overall financial system. It is estimated that the NBFCs as a whole account for 9.1% or
Rs. 4 trillion of assets of the entire financial system in India. As with most growing industries the
NBFC industry in India has undergone various structural changes (change in business models,
change in the broader market dynamics and change in the regulatory regime) since the start of
the decade and is today a more mature and developed industry, particularly after having come
tackled, arguably one of the most difficult phases in its history- the global economic crisis of
2008-2009.
At the beginning of the decade NBFCs in India faced considerable challenges ranging from high
cost of funds, limited borrowing sources and limited diversification, low asset profile, intense
competition from not just NBFCs but banks as well, difficulties in positioning themselves
between the banks and the money lenders, tepid economic and industrial growth and a high
degree of non- performing assets. With time however those foibles began to get washed away as
a fresh wave of changes began to envelop the sector. The NBFCs were able to broaden their
funding avenues and ensure greater diversification. The NBFCs borrowing profile extended
beyond banks to include mutual funds, insurance companies and also using the rather innovative
mode of securitizing their loans. One also began to see greater provisioning and an improvement
on the asset quality and overheads. People also began to look at NBFCs in a better light and they
were able to position themselves in between the banks (a lot of borrowers were not bank worthy
and couldn’t meet the norms prescribed by the banks) and the moneylenders (who used to charge
usurious rates of interest).
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Nonetheless the financial crisis from 2008-2010 caused a significant dent to the NBFC industry
Since the NBFC business is essentially an institutional funded business, during the post-
Lehmann crisis, credit disappeared off the table, as the purse strings were tightened and
confidence evaporated. With money becoming scarce it began to affect NBFCs from both the
asset and liability sides. The dearth of liquidity and credit also resulted in a loss of confidence in
the financial system with the banks unwilling to give out credit. Not just banks, sourcing from
mutual funds too became a no-show as the mutual fund industry saw widespread redemption
pressures with investors opting for investment in safer havens or just holding plain cash. With
the NBFCs key credit lines being asphyxiated, it caused a severe dearth of liquidity. Their
problems were further compounded at the other end, with the dissipation in liquidity, confidence
and demand, resulting in lower income available with the borrowers, thereby stunting their
ability to pay off the loans taken during the pre- Lehmann phase. Loss of employment due to cost
cutting measures was another factor that contributed to the inability to pay off loans.
This consequently resulted in large scale defaults and an increase in the Non Performing Assets
(NPAs) of the NBFCs. Another problem that NBFCs faced was that more than half of their
borrowings had a maturity period of less than a year while their loans had tenures of more than
three years. This asset liability mismatch caused severe strains on their financials. NBFCs that
had provided a high degree of unsecured loans (personal loans, unsecured SME loans), came
under particular strain during this period.
However picking up on the woes of the NBFCs and realizing their importance to the financial
system as a whole, the RBI (Reserve Bank of India) came up with a slew of measures to boost up
the NBFC industry. Banks were permitted to avail the liquidity support under the LAF (Liquidity
Adjustment Facility) in order to meet the funding needs of the NBFCs, a special repo window
under the Liquidity Adjustment Facility (LAF) was provided for the NBFCs, an existing Special
Purpose Vehicle (SPV) was used as a platform to provide liquidity support to NBFCs, non-
deposit taking NBFCs (NBFC-ND-SI) were allowed to raise short-term foreign currency
borrowings, the risk weights on bank’s exposures to claims on NBFCs-ND-SI were reduced from
150% to 100%, and higher CAR (Capital Adequacy Ratio) norms for NBFCs-ND-SI were
deferred by a year.
38
Aided by those measures and a general pickup in credit and confidence, the fortunes of the
NBFC industry began to change with time. Companies with a strong parentage (M&M Finance,
Reliance Capital, Shriram Transport Finance) were better positioned to deal with the crisis as
they were able to raise further equity and also implemented a re-aligning of their business
models in order to preserve their stability. The improvement of confidence in the credit system
also saw the asset liability mismatch reducing as banks were willing to lend to NBFCs for a
greater time period as opposed to just a maximum time frame of one year. Asset quality too
improved with more prudent credit norms, greater provisioning and the reduction in
disbursement of unsecured loans.
Outlook for NBFCs

The Indian NBFC sector plays a very important role in financial intermediation in the country,
accounting for around 9-10% of the total financial assets in the system and their fundamental
importance to the country’s development is set to continue. However going forward the situation
is likely to be a lot more challenging as the NBFC sector seeks to grapple with the twin issues of
diminishing competitive advantages (weaker barriers to entry) and greater regulatory pressures.
NBFCs have enjoyed tremendous competitive advantages relative to their banking peers for over
a decade now (and perhaps even longer), and some of the integral reasons for this occurrence
was because they were willing to put their money where their mouth was and seek to finance
segments that the traditional banks were wary off. While the banks struggled to understand these
risky markets which were predominantly based in rural areas and involved a target market that
functioned on variable sources of income and lacked any banking habits, the NBFC players took
the plunge and sought to develop their expertise in these segments. Despite facing initial
struggles, the NBFC players have, with time, developed a solid understanding of their market
and this have been able to realign and adjust their business models to cater to the market. With
time, these NBFCs have also been able to develop niche characteristics and thereby solid
competitive advantages relative to the banking class.
However it now seems evident that some of these competitive advantages might be ebbing away.
While the NBFCs laid the foundations for an institutional understanding of the traditionally
39
unbanked markets such as the rural financing market, the 2nd hand vehicle markets, the gold
loan market, etc. their banking counterparts (who are now feeling considerably reassured with
the success of organized participation in the market) have also realized that they can leverage on
these foundations and are hence better positioned to break the rather strong barriers to entry.
Thus going forward one is likely to see a greater influx of banking players within the NBFC
territories and unless the NBFC players can diversify their product offerings and tap newer
markets their competitive advantages will diminish.
Another obvious trend that seems to have taken shape is the greater regulatory restrictions that
are likely to be imposed on the RBI on the NBFC sector. In the last fiscal the Usha Thorat
Committee was set up to look into the workings of the NBFC sector and seek to bridge the
regulatory gap between banks and NBFCs and Non Deposit taking NBFCs and Deposit taking
NBFCs. The non deposit taking NBFC s are the best placed as they are not required to maintain
CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) and this has consequently
enabled them to enjoy better yields and spreads. While it seems unlikely that non deposit taking
NBFCs will have to start maintaining CRR and SLR, various other measures are poised to reduce
the laxities that both deposit taking and non deposit taking NBFCs enjoy. This increasing cost of
regulation is something that will challenge the profitability of NBFCs in addition to imposing
constraints on their business models.
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3.5 GOLD LOAN FEATURES
41
3.6 GOLD LOAN SECTOR

The Indian gold market is a market that has grown at an impressive pace and is still currently
brimming with opportunities. The World Gold Council believes that gold demand in the country
will continue to grow at 30% in real terms driven by urbanization, rapid GDP growth,
burgeoning middle class incomes and a sustained and potentially rising savings rate of 35-40%.
Opportunities galore for the organized segment The reason for the optimism of the Indian gold
loan market is essentially founded on the location of the gold loan market itself- India- which has
an exceptionally strong association with the metal. The country is estimated to be the largest
importer of gold and currently owns 10% of the total gold stock in the world at 18000-20000
tonnes. While this mammoth figure only highlights the scope of the gold loan market, the
opportunity lies in the fact that only 10% of the gold loan stock in the country has come into the
gold loan market. The remaining 90% still remains dormant and herein lies the opportunity for
gold loan players. What makes things particularly interesting is that while 10% of the stock has
been captured by the total gold loan players only a meagre 1-2 % is estimated to have been
captured by the organized players, thereby offering plenty of scope for the organized listed
players to gain market share.
Customer’s perception of gold loans is improving due to organized presence. While the potential
size and the scope of the gold loan market are very admirable, that alone is not enough. There
has to be an undercurrent of strong demand to lend credence to the scope and even on this count
there is much to be optimistic. In fact there has been a radical shift in the perception of gold
loans by the average Indian. Earlier while pledging gold for loans was frowned upon and was
largely looked upon as a last resort, these days gold loans are being taken even for the most
elementary reason (or as bridge loans), such that they have come to be known in common
parlance as “the loan of convenience”. Strong consumerism levels have only contributed to the
boom of gold loans. In addition to that while initially the gold loans were only taken by the rural
class, these days a broader class of people encompassing office goers in metros and semi urban
places, the elderly and the youth have all embraced this product. One only need to look at the
whopping gold loan growth rates seen by established players such as Muthoot Finance and
Manappuram Finance.
42
Organized gold loan NBFCs are better positioned than banks and the unorganized sector The
gold loan players are broadly divided into the unorganized segment (pawn brokers, fund brokers,
money lenders), the organized gold NBFC players and organized banks. It is estimated that 70%
of the gold loan market is unorganized with only 30% accounting for the organized segment. The
greater influx of the organized sector is responsible for bringing a degree of standardization to
the gold loan market and this has helped stoke demand. Of these three segments, the NBFC gold
loan players are better placed than the other two. While the unorganized segment charge usurious
rates of interest and undervalue the gold in the name of impurity, banks lack a sense of
expediency in the disbursal of loans and lack ample gold appraisers. The NBFC gold players
recognized these flaws in their competitors and were able to build a suitable business model that
eluded these flaws.
Resplendent Gold Loan market

The gold loan market in India has been booming for a while now as the price of gold continues
its upward trajectory and people’s perception of gold loan continues to change for the better.
Earlier while gold loans were largely limited to the rural areas and were generally taken as the
loan of last resort. However with time, even the semi urban and middle class segments of society
have realized the benefits of the gold loan which are also popularly known as “the loan of
convenience”. These days gold loans are also being taken as bridge loans. Going forward there is
a huge opportunity for the gold loan market.
Greater word-of-mouth, perception changes and the increasing share of the organized segment in
the total gold loan market can help bring the idle old gold stock to the gold loan market. The very
nature of its business makes investors like the loan against gold business. The risk factors seem
fairly low compared to the opportunities and growth prospects. Listed companies in this space
received investments from even private equity investors. Things could hardly have been better
for these companies. However, over the last few quarters everything seems to be going wrong for
these companies, and all the so-called positives seem to be getting neutralized, if not turning
negative.
43
Public sector banks have also been lending against gold jewellery. Actually, they have also lent
against gold, coins and so on. The reason people go to GLCs is the next-to-nil time they take in
disbursing loans. There is an allegation against these companies that, in their zest to disburse
loans quickly, often they do not undertake proper due diligence and hand out loans against stolen
jewellery, too. Typically, GLCs lend up to 80 per cent of the value of gold, making customers a
happy lot. However, last month, the Reserve Bank of India (RBI) reduced the loan-to-value for
GLCs to 60 per cent of the gold content.
Many of these GLCs have multiple names under which they do business. These companies
accept cash deposits through group companies with presence in the shops/outlets from where the
loans are handed out. This led to two issues. The first was the case of mistaken identity of the
company for the customer, who thinks he is giving a deposit to the gold loan company. The
second: that these NBFCs, classified as non-deposit taking entities, were in fact taking the
deposits. RBI, then prohibited these companies from accepting deposits at these outlets.
GLCs would charge interest rates upwards of 20 per cent, even up to 30 per cent, while in the
case of public sector banks, it would be less than half, or 12-13 per cent. The banks are happy
with these loans as these are of short duration, have more than adequate security and in today’s
times, are more or less risk-free.
The know-your-client (KYC) norms need to be followed by GLCs and banks alike. While in the
case of a bank, the possibility of a walk-in customer not getting a loan is high. Typically, to get a
loan you would have to go to a bank with which you have an existing relationship. Not so with a
GLC. You could walk into any branch of a GLC, and get a loan. The system is quite lax and
loans are easy to get.
GLCs’ television ads show bundles of notes being exchanged across the counter in lieu of gold
jewellery, while in banks there are restrictions on cash withdrawals from one’s own account. It is
expected that changes to this situation would be introduced shortly.
The microfinance business has taken a beating. The hype created around the initial public
offering, and thereafter, of SKS Microfinance, is still fresh in the minds of investors. Gold prices
have touched lifetime highs in India, thanks to a depreciating rupee. However, RBI is concerned
44
about the future of GLCs if gold prices were to soften in India. Gold prices are softer abroad by
about 12 per cent. Finally, the periodic tapping of the bond market by GLCs to raise resources is
also worrying, and does not help the cause of GLCs.
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3.7 MAJOR PLAYERS

The key players in the Indian gold loan market include the unorganized sector, banks – public/
private/cooperatives and NBFCs. While the unorganized sector, comprising local pawnbrokers
and moneylenders, has traditionally dominated the gold loan market for many decades and still
commands nearly 75% of the market, the organized sector, led by NBFCs, is catching up fast.
The organized sector has grown at a rapid pace of 40% CAGR from 2002 to 2010 is expected to
grow by 33% to 41% CAGR in 2011. And in doing so, these companies are challenging the
dominance of the large unorganized sector. Within the organized sector, NBFCs have grown at
a rapid rate from 18.4% in FY07 to 32.2% in FY10
Above figure depicts the gold loan portfolio size for key organized sector players, again
highlighting the rapidly growing dominance of NBFCs (e. g, Muthoot Finance, Manappuram and
Muthoot Fincorp).
46
Major players and market share

Company Gold loan market Gold loan market
share (2011) share (2012)
Muthoot finance 13.4% 19.5%
Manapurram finance 4.90% 6.8%
Indian bank 13.2% 10.40%
Muthoot Fincorp 4.80% 5.90%
Federal bank 4.3% 2.3%
South Indian Bank 6.10% 6.30%
SBT 6.4% 5.10%
Andhra bank 3.6% 3.7%
IOB 12.6% 13.9%
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3.8 GOLD LOAN PROCESS
 The prospective gold loan customer is first explained the different gold loan schemes
available.
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 After selecting a certain scheme, proof of identity is procured from the customer even as the
resident gold appraiser, appraises the ornaments using a calibrated weighing machines. Other
preliminary and additional tests are done without damaging the ornaments.
 The rate per gram is fixed by the corporate office and this is used to determine the final loan
amount though the branch manager also has the discretion to approve higher rates of upto
Rs.10 per gram.
 Computerized records of the applicant are maintained and the gold is taken to the in-house
safety vaults even as the loan is prescribed at a particular rate.
 The loans which are of a standard period of 12 months are usually repaid within three to six
months after which the ornaments are handed back. Loans that are repaid in less than 12
months are usually charged a lower rate of interest than initially prescribed.
 If the loans are not repaid back within 12 months, company informs the customer through
registered letters or legal notices. If the loan is still not repaid after 18 months, the gold is
liquidized and the account is classified as NPA.
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3.9 LOAN INTEREST RATE COMPARISON ACOSS CATEGORIES
A comparison of interest rates charged by lenders across loan categories is shown in above. The
comparison of interest rates shows that gold loans fetch banks higher rates as compared to home
loans and car loans. Hence, this category is being targeted aggressively by banks. However,
NBFCs have a much greater focus on gold loans and continue to provide attractive loan features
which enable them to charge higher rates, generate higher profits and grow rapidly in a singular
direction.
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3.10 COMPARISM OF GOLD LENDER OFFERING
51
3.11 GOLD LOANS AID FINANCIAL INCLUSION

Recently, there has been considerable focus on the success enjoyed by the leading players in the
gold loan segment (incidentally, one of India’s fastest growing businesses), and how increasing
number of people are shedding age-old taboos to borrow money against their gold jewellery.
While this traditional business of lending money against gold was professionalized and scaled-up
in recent years by NBFCs, all the major national banks have now jumped into the fray with
enthusiasm. Gold loans are particularly well-suited for India because of the following reasons:
Avoids debt trap:

A gold loan is settled either by repayment or, in case of default, by sale of the pledged security.
The cycle of non-payment and rollovers of the loan at escalating rates of interest does not
happen. In the worst case the borrower may lose his gold but there is no debt trap.
Simple procedures, fast disbursal:

The formalities in availing gold loans are minimal and procedures are simple. This makes gold
loans ideal for the micro-finance segment where the loan amounts are small.
No depreciation of underlying asset:

Unlike other secured loans, the underlying asset in a gold loan is not subject to depreciation and
so, the lender always enjoys a degree of comfort not available in other loans As for a borrower
facing temporary difficulties, the only compulsion is to keep on servicing the interest component,
till he/she is able to repay.
No questions asked:
People often borrow money on account of social compulsions which cannot be avoided in our
cultural context; occasions like weddings, festivals, religious and social obligations etc. India’s
banking sector continues to carry a hangover from the days of credit rationing that bank lending
must always be for “productive” purposes. Gold loans are 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.
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Suited for the unorganized sector:

Gold loans are ideal for 90% of India’s workforce, employed in the unorganized sector and those
lacking documents to prove their incomes. This is a segment conventional banks usually avoid
because their appraisal and credit scoring is based on formal documentation. Gains for the wider
economy: India has the world’s largest stock of privately held gold ranging from 15,000 -20, 000
tonnes of gold. When this gold is kept idle in our lockers and vaults, it is a huge drag on the
Indian economy: It has the effect of keeping billions of dollars in savings out of the financial
system. This is a huge sum that otherwise could have been lent out to industries and for building
infrastructure. When people borrow against gold (technically called “monetisation”), the impact
is to set in motion a whole new chain of economic activity boosting demand and consumption
expenditure in the economy.
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3.12 CRITICAL SUCCESS FACTORS FOR GOLD LOAN

COMPANIES
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3.13 CHANGING CONSUMER PERCEPTION DRIVING

INDIA’S ORGANIZED GOLD LOAN MARKET
India is having the highest gold stock in the world and the demand for gold is increasing
continuously in the country, backed by the tradition of wearing gold in weddings, festivals, and
various other occasions. People are also buying gold as the value of gold assets is rising
continuously.
Report, “Gold Loan Market in India”, reveals that the organized gold loan market has grown
tremendously over a period of time, owing to the changing consumer perception about gold loan
and rising loan requirements. Over a period of time, the perception of consumers towards gold
loan has changed drastically. In the earlier times, gold owned by Indian families was rarely
liquidated unless in extreme financial need. In addition, the gold loan or loan against ornaments
was taken by the local pawnbrokers and money lenders. Due to high gold stock and high
consumption of gold in Southern India, the presence of money lenders was highest in that region.
Similarly, organized gold loan market originated from the South India and have largest share of
almost three-fourth of the total gold loan market. In Southern India, gold loan is very much
preferred as compared to other loans and has become the culture as the lenders do not accept any
other collateral against loan.
A new trend of gold financing for purchasing has also been observed in the industry. It was
observed that the consumer outlook is changing as people are increasingly sorting to gold loans
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in order to meet their short-term needs. Further it is observed that the organized players are
exploring the potential, and expanding their networks into North, East and West regions.
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CHAPTER 4
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4.1 INDIAINFOLINE – A VIEW

4.1.1 Corporate structuring:
The content services represent a strong support that drives the broking, commodities, mutual
fund and portfolio management services businesses. Revenue generation is through the sale of
content to financial and media houses, Indian as well as global. The content services represent a
strong support that drives the broking, commodities, mutual fund and portfolio management
services businesses. Revenue generation is through the sale of content to financial and media
houses, Indian as well as global.
4.1.2 Indiainfoline vision:

To be the most respected company in the financial services space
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4.2 MILESTONES
1995
Incorporated as an independent equity research and consulting firm
1999
Launched internet portal www.indiainfoline.com
2000
Commenced distribution of life insurance and mutual funds
2004
 Acquired commodities broking license
 Launched portfolio management services
2006
 Launched retail finance business
 Acquired DGCX membership
2005
Listed on BSE and NSE Received RBI license for undertaking NBFC activities
2007
Commenced institutional equities broking business Formed Singapore subsidiary IIFL (Asia)
Pte. Ltd
2008
Launched wealth management services under the IIFL Wealth brand Received insurance broking
license from IRDA
2009
Acquired registration for housing finance business from NHB Obtained venture capital license
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2010
Became the first Indian entity to receive membership of the Singapore Stock Exchange and
Colombo Stock Exchange
2011
 Launched IIFL Mutual Fund
 Maiden NCD issue
2012
 Launched Real Estate Fund
 Received registration for distribution of NPS from PFRDA
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4.3 SERVICES
EQUITIES ADVISORY AND BROKING
IIFL offers online and offline broking and advisory services in cash and derivatives segments to
retail and institutional clients. Company serves close to one million retail investors through its
branches spread over more than 500 cities and towns across India. IIFL’s institutional equities
business has top-tier rankings with leading institutional investors in India and has established
leadership in block placements. IIFL is also an active member of the Colombo Stock Exchange
for stock broking.
The Investment Banking team is led by professionals having over 20 years of experience in the
business. The team is well placed to leverage IIFL’s in-depth research capabilities, institutional
placement capabilities, wide retail reach and relationships with both issuers and investors.
Average daily turnover in equities segment was ` 52.6 billion in FY12 as compared with ` 53.4
billion in FY11. Broking yields witnessed pressure due to change in product mix in favour of
futures and options segment Equity market share in NSE was at 3.8% in FY12
The Company received two successive awards during the year:

 ‘Best Broker – India’ by FinanceAsia Country Awards, June 2011
 ‘Best Broking House with Global Presence’ by D&B Equity Broking Awards, October 2011
Key strengths
 Award-winning research team which gives in-depth analysis on both technical and
fundamental side of the business. We have independent teams catering to the institutional
segment and retail group.
 Present in over 3000 business locations which include a vast network of own branches and
franchisees across the country
 Strong in-house developed technology for internet, mobile trading and back office
Future roadmap
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 Be a financial planner for customers and provide research based advice on assets based on
every clients’ risk profile
 Continuously enhance customer delight by offering the best customer service standards
 Focus on creating an employee friendly work environment to retain talent
 Strengthen our investment banking business to position ourselves favourably to capture new
emerging opportunities
Industry overview
With the rapid growth in options volumes, the share of the F&O segment in overall market
volumes increased to 90% of total volumes in 2011-2012 leading to further pressure on yields.
Given the prevailing negative sentiments in the global and Indian environment, India’s
investment banking fee pool came under serious pressure last year. The equity raised through the
capital markets in the last financial year was ` 604 billion as against ` 969 billion in the previous
year. Private equity continued to be an active and alternate pool of capital and the deal value was
US$ 10.1 billion in CY11 as against US$ 8.1 billion last year.
Given India’s overall macro economic growth story, long-term potential of equities and
commodities trading is good on back of low penetration and return generating potential of these
asset classes.
COMMODITIES AND CURRENCY

IIFL offers online and offline services in the commodities segments to retail clients in MCX and
NCDEX. IIFL customers have access to high quality research on commodities and best in class
Trader Terminal to enable them to trade in commodities, online or over the phone.
IIFL customers can also trade in the currency segments of NSE and MCX SX. IIFL customers
have access to research and top quality service through a Relationship Manager for all their
investment needs.
IIFL’s average daily turnover in commodities doubled to ` 14.8 billion in FY12 from ` 7.4 billion
in FY11 Commodities market share on both exchanges (MCX and NCDEX) increased to 2.3%
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from 1.9% in 2010-11 Total turnover in FY12 in the currency segment was ` 2,530 billion as
against ` 190 billion in FY11
Key strengths
 Vast distribution network with a presence in over 3,000 business locations across 500 cities
and towns across India
 Our proprietary software, Trader Terminal offers the facility to trade online and on mobiles
in currencies and commodities
 Award-winning research team ensures monthly updates, special reports, pre-market reports
and trading strategies in the commodity and currency segments
Future roadmap
 Build upon features on IIFL Trader Terminal to improve trading experience of customers
 Develop research capabilities to ensure top quality advice to clients
Industry overview
Commodities markets have been experiencing huge growth. The promising nature of these
markets has made them an attractive investment avenue for investors globally. Commodity
markets have a huge potential in the Indian context particularly because of the agri-based
economy. Trading volumes in the Indian commodity exchanges rose 54% from ` 112,867 billion
in 2010-11 to ` 173,696 billion in 2011-12.
Currencies performed well in FY12, with a contract volume of 746,057 contracts; 352% greater
than 2011. Indian rupee futures surpassed previous monthly and daily records, achieving an
average daily value of US$ 1.17 billion and a monthly value of US$ 26.82 billion.
CREDIT AND FINANCE

IIFL offers credit and finance facilities through its subsidiaries, India Infoline Finance Limited (a
98.82% subsidiary of IIL) and India Infoline Housing Finance Limited. Your Company offers a
wide range of secured loan products that include home loans, loan against property (for
individuals and corporates), loans against capital market instruments, healthcare equipment
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financing and loans against gold. The Company’s loan book grew from ` 32.9 billion in 2010-11
to ` 67.5 billion in 2011-12. The diversified product portfolio, robust credit and risk management
processes coupled with efficient collection mechanism has resulted in overall NPAs of less than
1%.
In FY12, home loans and loans against property contributed to 44.8% of the total loan book.
Loans against capital market products reduced significantly from 35.2% in 2010-11 to 11.8%
due to high volatility and a downturn in the stock markets. Gold loan book size saw a
considerable increase and now comprises 41% of our total loan book.
IIFL successfully completed Initial Public Offering of Secured Redeemable Non-Convertible

Debentures (“NCDs”) aggregating to ` 7,500 million. The issue received an overwhelming
response. These NCDs are listed and traded on NSE and BSE. Moneyline Credit Limited, a
stepdown NBFC subsidiary, was merged with India Infoline Finance Limited. This has enabled
consolidation of all lending and investments businesses (except housing loans) to ensure better
operations and control.
Key strengths
 This business leverages the brand name and existing customer portfolio of the parent
company
 Team of experienced professionals with work experience at globally respected financial
houses Pan-India network and a strong distribution with widespread presence in Tier-II and
III cities
 Presence of a proprietary loan processing system that enables stringent credit checks, faster
loan processing, extensive data capture and higher accuracy
Future roadmap
 Expand presence in Tier-II and Tier-III cities
 Continuously invest in technology and training to ensure robust credit and risk management
processes
 Delight the customer with superior service
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Industry overview
India is witnessing increasing urbanisation, which will fuel demand for homes and commercial
space. There is a huge demand supply mismatch for dwelling units which means demand for
loans will remain robust in the long to medium term, irrespective of high interest rates.
The organised gold loan market is pegged at US$ 8 billion and has grown at 40% CAGR since
2002. Despite this, a mere 1.5-2% of India’s gold stock of 18-20,000 tonnes reaches the
organised sector. According to the World Gold Council, demand for gold in India is expected to
grow 30% in real terms, which opens up a huge opportunity for the sector.
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FINANCIAL PRODUCT DISTRIBUTION

IIFL is a pan-India distributor of financial products including life insurance, mutual funds, bonds
and debentures, among others. Your Company today distributes a wide product basket to suit
every investment need for diverse age groups, preferences and backgrounds. Of these products,
the dominant product category is life insurance and the business is conducted through India
Infoline Insurance Brokers Ltd. It maintains a prudent balance between endowment, ULIPs and
retirement products to suit the risk appetite of investors.
IIFL has adopted an ‘open architecture’ model to distribute products of major insurance
companies including Reliance Life Insurance, ICICI Prudential Life, HDFC Life, Birla Sun life,
Life Insurance Corporation, Max New York Life Insurance and others.
Insurance premium (API) grew 20% to reach ` 3.3 billion Initiated an online customer
investment portal to enable faster turnaround time and quality service Received consent for
registration as an Aggregator under National Pension System from PFRDA
Key strengths
 Strong relationships with Life Insurance and Mutual Fund manufacturers
 Presence of a diverse product portfolio to suit investment needs of varying customer profiles
 Robust multi-channel sales network comprising sales team, tele-calling team and a wide
branch network
Future roadmap
 Provide training to the sales team to ensure high levels of customer satisfaction by providing
the right product based on customer requirements and risk profile using financial planning
tools
 Leverage on the existing branch network and equity client relationships to cross-sell
insurance and mutual fund products
 Focus on quality and persistency in the insurance business
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Industry overview
The insurance as well as mutual fund industry is facing sectoral headwinds because of regulatory
changes. The Indian insurance sector witnessed a de-growth of 13% in 2011-12. LIC, with a
market share of 71%, witnessed a 6% decline in new business premium in FY12 whereas the
private sector witnessed a decline of 17%.
The Mutual Fund industry faced a downtrend and saw its asset management base shrink
marginally in fiscal year 2011-12. The industry lost over 0.7 million folios during the six months
ended March 2012 to end with 46.4 million folios. The retail category was the biggest loser in
terms of folios, especially in equity. This was mainly because of the volatile movement of the
equity market. However, retail investors increased their presence in debt-oriented mutual funds,
which may be attributable to investors looking at alternate asset classes post the downfall in the
domestic equity markets in 2011.
WEALTH MANAGEMENT
 Wide presence in thirteen major cities of India and six international locations
 All international locations fully regulated under their respective jurisdictions – New York
(SEC), London (FSA), Dubai (DIFC), Singapore (MAS), Mauritius (FSC), Geneva (SRO)
and Hong Kong (SFC).
 A young, dynamic and dedicated team comprising more than 160 advisors bring to the table
wide ranging wealth management experience.
 A proprietary technology system that strengthens back-office operations and processes by
automation and introduction of work-flow covering execution, risk and reports.
Future roadmap
 Focus on training to develop best-in class wealth managers
 Enhance the existing technology platform incorporating transaction processing, business
intelligence, query resolution and CRM
 Provide a differentiated service by optimally using technology and ensure that it is available
across multiple platforms including smart phones and tablets.
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Industry overview
The world’s population of high net worth individuals (HNWIs) increased marginally by 0.8% to
11.0 million in 2011, but HNWIs’ aggregate investable wealth as measured by asset values fell
1.7% to US$42.0 trillion
If various estimates are to be believed, Ultra High Net worth households (HNH) are slated for a
three-fold increase in the next five years from an estimated 81,000 (2011-12) to 286,000 (2016-
17). The total net worth of Indian ultra HNHs, is expected to reach ` 318 trillion in 2016-17 from
an estimated ` 65 trillion in 2011-12. This growth in net worth will be driven predominantly by
growth in the number of ultra HNHs and the returns on wealth.
IIFL’s Private Wealth business has aggregated over ` 240 billion of Assets under Advise (AuA)
on a client base exceeding 3,000 families. IIFL has an exhaustive product platform with advisory
services for fixed income, equity, real estate and commodities. Our fixed income practice
coupled with a large bond desk allows Private Wealth clients direct access to sovereign,
corporate and collateralised debt. The bond desk has been instrumental in winning some of the
largest corporate mandates for treasury management, in addition to being advisors to some large
corporate treasuries.
Major highlights, 2011-12 Launched ‘Wealth Bank’ services to help family office clients
synchronise their wills with their nominations Launched QMS (Query Management Solution), a
one-click technology platform for clients and advisors alike A group of Senior Advisors
successfully cleared a full-time mini-MBA programme by NYU Stern University in Mumbai
Organised successful client conferences in Mumbai and Pune
PROPERTY SERVICES AND REAL ESTATE FUND

Presence of multiple touch points via branches, call centres and the web Presence of a highly
qualified team of experts who thoroughly understand the real estate sector to efficiently guide
clients
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Robust real estate industry networks to source opportunities suiting fund mandate Proprietary
structures that create value for investee companies / projects
Future roadmap
 Increase geographical reach to more cities and towns in India Focus on cross-selling – bring
the product offering to IIFL Finance, IIFL Wealth and Broking customers across the country
Change product mix to include more of resale, commercial and rental transactions
 Expand structures offered to investors and investees through the launch of subsequent series
Industry overview
 The real estate industry is one of the fastest-growing industries in our economy with a
compounded annual growth rate of around 30%. Increase in the standard of living makes way
for higher demand in the residential sector. There is an estimated requirement of 80 million
housing units over the next fifteen years and 200 million sq. ft. of office space over the next
five years.
 SEBI has introduced AIF guidelines creating a distinct space and operating environment for
real estate funds and similar pooled investment vehicles. There continues to be significant
demand for capital in the real estate sector, further opening up the space for such funds.
Property services
Buy, sell, lease, invest – our property services covers all customer segments including retail,
investors, corporate and institutions. Our services include advisory services for land and
wholesale transactions spanning acquisition, sale, leasing, project use and planning; broking
services for retail transactions spanning developer sales, resale and rentals.
Real Estate Fund

IIFL Group successfully launched IIFL Real Estate Fund (Domestic) Series 1 in December, 2011
under India Infoline Venture Capital Fund (IIFL VCF), the venture capital arm of IIFL Group.
The Fund was fully subscribed to its issue size of ` 5 billion by its initial closing in January 2012.
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The Fund has been incorporated to focus on the real estate sector in India by investing in equity,
debt and Equity Linked Instruments of promising real estate and construction companies
involved in projects or ventures that have significant growth potential. The Fund will focus on
investing in mainly residential real estate projects with significant growth potential, developed
by leading players in the top seven cities across India.
Presence of a strong distribution network spanning seven key locations across India with
leadership positions in markets like Mumbai and Chennai Launched IIFLpropertysolutions.com
portal and call centre operations Advisory and Investment Committees Residential Supply.
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4.4 INDIAINFOLINE COMMODITIES LTD

Indiainfoline Commodities Pvt Limited is engaged in the business of commodities broking. Our
experience in securities broking empowered us with the requisite skills and technologies to allow
us offer commodities broking as a contra-cyclical alternative to equities broking.
Indiainfoline Marketing & Services

Indiainfoline Marketing and Services Limited is the holding company of India Infoline
Insurance Services Limited and Indiainfoline Insurance Brokers Limited.
Equities
Indiainfoline provided the prospect of researched investing to its clients, which was hitherto
restricted only to the institutions. Research for the retail investor did not exist prior to
Indiainfoline. Indiainfoline leveraged technology to bring the convenience of trading to the
investor’s location of preference (residence or office) through computerized access. Indiainfoline
made it possible for clients to view transaction costs and ledger updates in real time.
Mortgages
During the year under review, Indiainfoline acquired a 75% stake in Money tree Consultancy
Services to mark its foray into the business of mortgages and other loan products distribution.
The business is still in the investing phase and at the time of the acquisition was present only in
the cities of Mumbai and Pune. The Company brings on board expertise in the loans business
coupled with existing relationships across a number of principals in the mortgage and personal
loans businesses. Indiainfoline now has plans to roll the business out across its pan-Indian
network to provide it with a truly national scale in operations.
Commodities
Indiainfoline extension into commodities trading reconciles its strategic intent to emerge as a
one-stop solutions financial intermediary. Its experience in securities broking has empowered it
with requisite skills and technologies. The Company’s commodities business provides a contra-
cyclical alternative to equities broking. The Company was among the first to offer the facility of
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commodities trading in India’s young commodities market. Average monthly turnover on the
commodity exchanges increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market has
several products with different and non-correlated cycles. On the whole, the business is fairly
insulated against cyclical gyrations in the business.
Invest Online
Indiainfoline has made investing in Mutual fund and primary market so effortless. All you have
to do is register with us and that’s all. No paperwork no queues and No registration charges.
Insurance
An entry into this segment helped complete the client’s product basket; concurrently, it
graduated the Company into a one-stop retail financial solutions provider. To ensure maximum
reach to customers across India, we have employed a multi pronged approach and reach out to
customers via our Network, Direct and Affiliate channels. Following the opening of the sector in
1999-2000, a number of private sector insurance service providers have commenced operations
aggressively and helped grow the market.
Mutual fund
Indiainfoline offers you a host of Mutual fund choices under one roof, backed by in-depth
research and advice from research house and tools configured as investor friendly.
Wealth Management Service

Imagine a financial firm with the heart and soul of a two-person organization. A world-leading
wealth management company that sits down with you to understand your needs and goals. We
offer you a dedicated group for giving you the most personal attention at every level.
Research
Sound investment decisions depend upon reliable fundamental data and stock selection
techniques. Indiainfoline Equity Research is proud of its reputation for, and we want you to find
the facts that you need. Equity investment professionals routinely use our research and models as
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integral tools in their work. They choose Ford Equity Research when they can clear your doubts.
Portfolio Management Service

Indiainfoline Portfolio Management Service is a product wherein an equity Investment portfolio
is created to suit the investment objectives of a client. Indiainfoline invest resources into stocks
from different sectors, depending on client risk-return profile. This service is particularly
advisable for investors who cannot afford to give time or don't have that expertise for day-to-day
management of their equity portfolio.
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4.5 BUSINESS STRATEGY

Positioning:
Market positioning statements of Indiainfoline are “At Indiainfoline we give you single window
service” and “We also ensure your comfort”. So, Indiainfoline focus on the consumers who
prefer almost all investment activities at same place by providing number of various financial
services. At Indiainfoline a person can purchase or sell shares, debentures etc. and at the same
place also demat it. Indiainfoline also provides other investment option to the same person at
same place like Mutual Fund, Insurance, Fixed Deposit, and Bonds etc. and help the person in
designing his portfolio. By this way Indiainfoline provides comfort to its customers.
Target Market:
Indiainfoline uses demographic segmentation strategy and segment people based on their
occupation. Indiainfoline uses selective specialization strategy for market targeting. Target
person for the Indiainfoline Stock Broking and India Infoline Investment Service are persons
who can work as sub-broker for the companies. Companies focus on Advisors of Insurance and
post office, Tax consultants and CAs for making sub-broker
Channel System:
Indiainfoline uses one level marketing channel for investment product distribution. Sub-brokers
work as intermediary between consumer and company. Company has both forward and
backward flow of activity through channel. Company distributes stationery, brokerage, and
information forward to its sub-broker. The sub-brokers send filled forms, queries, amount of
investment etc. back to the company.
Training Channel Members:

Indiainfoline provides training to the sub-brokers because they will be viewed as the company by
the investors. The executives of Indiainfoline explain various new schemes of investment to the
sub-brokers with its objective, risk factors and expected return. Company also periodically
arrange seminar to guide sub-brokers.
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Advertising and Promotion:

The objective of advertising of Indiainfoline is to create awareness about services of
Indiainfoline among investors and sub-brokers. Indiainfoline also publishes its weekly Stock
Market Newsletter ‘Market Mantra’.
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FUNDAMENTAL RESEARCH SERVICES:

The Sunday Weekly Report:
This weekly report is the ace of all reports. It offers a comprehensive market overview and
likely trends in the week ahead. It also presents few top picks based on an in-depth analysis of
technical and fundamental factors. It gives short term and long term outlook on these scrip’s,
their price targets and trading strategies. Another unique feature of this report is that it provides
an updated view of about 70 prominent stocks on an ongoing basis.
The Industry Watch:

This report provides an in-depth analysis of specific industries which are likely to outperform
others in the economy. It analyzes their strengths and weaknesses and ascertains their future
outlook. The final view is arrived at after thorough interaction with industry experts. Also
comparative performances of various companies in the sector are evaluated and top picks are
recommended.
Stock Analysis:
Indiainfoline stock research has performed very well over the past few years and the
Indiainfoline Model Portfolio has consistently outperformed the benchmark indices. The
fundamentals of select scrips are thoroughly analyzed and an actionable advice is provided along
with investment rationale for each scrip.
Flash News:
Key developments and significant news announcements that are likely to have an impact on
markets / scrips are flashed live on trading terminals. Flash news keeps the market participants
updated on an online basis and helps them to reshuffle on their holdings.
4.1.6 Technical research service

Nifty Tracker:
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Nifty Futures is the most traded instrument with highest volumes in F & O and excellent
liquidity. The team tracks the Nifty Future and generates calls based on unique trading system
which is a result of their focused research over the past few years. The objective is to generate
positive returns for traders who are looking for a high risk / high reward product.
Online Chart:
An online forum to help clients, specifically day traders in judging the directions of the market
and stocks which are in the limelight.
Intraday Calls:
For day traders, indiainfoline provides intra-day calls with entry, exit and stop loss levels during
market hours. These calls are flashed on their terminals. Their analysts continuously track the
calls and provide recommendations according to the market movements.
Position Calls:
Indiainfoline “Position Trading Calls” are based on thorough analysis of the price movement in
select scrip’s. These calls are for a 10-15 day time span with stop loss and target levels. These
calls are flashed on their terminals during market hours.
Derivative Strategies:
Their analysts take view on the Nifty and select stocks based on the derivatives data and
technical tools. Suitable “Derivative Strategies” are devised, which are flashed on their
terminals and published in their reports.
Futures Calls:
A customized product for HNIs to help them trade with leveraged position; wherein clients are
advised on the stocks with entry, exit and stop loss level for short term benefits. Over and above
this, financial status of the calls is monitored at all times.
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4.4 BUSINESS MODEL
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4.5 INDIA INFOLINE FINANCIAL LIMITED

India Infoline Finance Limited is a subsidiary of India Infoline Limited (“IIFL”). It was
incorporated on July 7, 2004 as a private limited company “India Infoline Investment Services
Private Limited”. The Status of company was changed to a public limited company on May 15,
2007 and name was changed to “India Infoline Investment Services Limited”. Further the name
of the Company was changed to “India Infoline Finance Limited” pursuant to Fresh Certificate
of Incorporation dated November 18, 2011.
The company is a systemically important non-deposit taking NBFC focusing on Mortgage

Loans, Capital Market Finance, Gold Loan and Healthcare Finance. The lending and other
financial products of the company include,
 Mortgage Loans, which includes Housing Loans and Loans against Property
• Capital Market Finance, which includes Loans against Securities, Promoter Funding, Margin
Funding, IPO financing and other structured lending transactions.
• Gold Loans, which includes finance against security of mainly used gold ornaments.
• Healthcare Finance, which includes finance for medical equipments and project funding in
the healthcare sector.
The Promoter of the company, IIFL is a financial services organization having presence across
India. The global footprint extends across geographies with offices in New York, London,
Geneva, Hong Kong, Singapore, Dubai, Mauritius and Colombo. It is listed on BSE and NSE.
IIFL Group’s services and products include retail broking, institutional equities, commodities
and currency broking, wealth advisory, credit & finance, insurance broking, asset management,
financial products distribution & investment banking. The product/ services portfolio of IIFL
caters to the diverse investment and strategic requirements of retail, institutional, corporate and
affluent clients. As on March 31, 2012, IIFL has presence in over 4000 business locations which
include over 1,900 branches and over 2,300 registered franchisees, spread across 959 cities in 28
states and union territories in India. India Infoline Finance Limited leverages extensively on the
infrastructure, distribution network and insights of IIFL Group into market and customer needs.
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As of March 31, 2012, India Infoline Finance Limited has a total of 1,323 branches – 34
branches for Mortgage Loans and Healthcare Finance distribution network of which 32 branches
are co-located with the branch network of IIFL Group and a total of 1297 gold loan branches out
of which 1180 are exclusive Gold Loans branches. As of March 31, 2012, the company has an
access to over 2,900 sales executives from the retail teams and over 120 sales executives from
the wealth teams of IIFL for Capital Market Finance business. The company’s employee strength
as on March 31, 2012 was 6,094.
As on March 31, 2012, Mortgage Loans accounted for 44.70% of Loan Book, Capital Market
Finance accounted for 11.86% of Loan Book and Gold Loans accounted for 41.07% of Loan
Book.
Competitive Strengths:
• Extensive benefit from Promoter.
• Secured Loan Book and Strong Asset Quality.
• Adequately capitalized to fund to grow.
• Access to cost effective funding sources.
• Well Defined Processes.
• Access to Extensive Distribution and Branch Network.
• Experienced Management Team.
• Technology, Analytics and Credit bureau usage.
Strategy:
• Focus on retail and secured lending.
• Enhancing the product bouquet.
• Widening the Distribution Network.
• Building a robust IT infrastructure and IT systems
• Strengthen the operating processes and risk management systems.
81
Risks and Concerns:

 Any increase in the levels of non-performing assets (“NPA”) on loan portfolio, for any
reason whatsoever, would adversely affect business and results of operations.
 IIFL’s reported asset quality indicators have so far remained comfortable despite marginal
increase with Gross NPA and Net NPA of 0.61% and 0.44% as on Mar-12 as compared to
0.37% and 0.30% as on Mar-11. Any volatility in interest rates which could cause Gross
Spreads to decline and consequently affect profitability.
 Changes in the value of Rupee and other currency changes
 Unanticipated turbulence in interest rates or other rates or prices; the performance of the
financial and capital markets in India and globally
 Changes in political conditions in India
 The rate of growth of loan assets
 The outcome of any legal or regulatory proceedings
 Changes in Indian and/or foreign laws and regulations, including tax, accounting, banking,
securities, insurance and other regulations; changes in competition and the pricing
environment in India; and regional or general changes in asset valuations.
 Any changes in connection with policies, statutory provisions, regulations and/or RBI
directions in connection with NBFCs, including laws that impact lending rates and ability to
enforce collateral
Emergence of new competitors

 Occurrence of natural calamities or natural disasters affecting the areas in which Company
has operations
 The performance of the financial markets globally & performance of the Indian debt and
equity markets
 Ability to attract and retain qualified personnel
Financials:
The Consolidated Income from Operations and Profit after Tax (PAT) for the financial year
ending March 31, 2012 is Rs. 9084.58 million and Rs. 1053.81 million respectively. The
82
Consolidated Income from Operation and Profit after tax has grown at a CAGR of 54.33% and
44.85% respectively over the last four years. The Loan Book has grown at a CAGR of 63.82%
over the last four years.
83
4.4 IIFL GOLD LOAN
Gold loan or loan against gold is the easiest and quickest way for servicing one’s financial needs.
To avail a gold loan, all you need to do is pledge your gold ornaments with IIFL and they would
provide you with a loan amount as per the market value of your gold. Unlike other loans, gold
loan does not require you to provide any income or salary proof. Moreover, it has comparatively
lower interest rates; requires lesser documentation, and hence is processed in lesser time.
IIFL provide maximum loan against your gold at lowest interest rates. It has strong presence
Pan-India and has serviced a large number of customers in a very short span. They offer different
types of schemes as per requirement and convenience. Following are the main features of our
loans:-
 Loan amount ranges from min Rs 5,000 to max Rs 10,00,000

 Tenor for loans ranges from 3 months to 12 months
 Loan can be paid back on a monthly or quarterly basis
 Interest / Loan Amount due can be paid at any of our Gold Loan branches pan-India
 Minimal amount of paperwork and documentation is required
 Loan gets processed in as low as 5 minutes
 Variety of schemes are available to chose from
 Gold is insured and secured safely with us in fire and burglary proof vaults
84
4.4.2 Why IIFL for gold loan?

 Minimal paper work and documentation
 Very low processing time (few minutes)
 Zero processing fee
 Low Interest Rate
 Instant disbursal of loan
 Security and Insurance of Gold Pledged
85
CHAPTER 5
86
5.1 RESEARCH & STUDY

Research methodology:
Research is a structured enquiry that utilizes acceptable scientific methodology to solve problems
and create new knowledge that is generally applicable. Scientific methods consist of systematic
observation, classification and interpretation of data. Although we engage in such process in our
daily life, the difference between our casual day- to-day generalization and the conclusions
usually recognized as scientific method lies in the degree of formality, rigorousness, verifiability
and general validity of latter.
Research objective:
To understand increasing trend of gold loan
Research Hypothesis:
Ho: Indian gold loan market trends is not on expansion mode
H1: Indian gold loan market is on expansion mode
Research area:
Mumbai
Research sample size:

100 respondents
Research type:
Exploratory research
Research limitation:
 Only 100 respondents were being surveyed during research
 Respondents having gold loan were being surveyed
87
5.2 FINDINGS & ANALYSIS

INDUSTRY ANALYSIS (50 respondents)
How do you rate Indian gold market in the preview of gold buying?
 Very Good
 Good
 Average
 Poor
 Very poor
Very Good Good Average Poor Very poor

6 10 26 4 4
in No
4 6
4
Very good
10 Good
Average
Poor
Very poor
26
88
Do you feel that there is a shift in buying of gold from consumer per se?
 Yes
 No
Yes No
36 14
in No
14
Yes
No
36
89
Do you feel that gold phenomenon has become stagnant in India too due to continuous rise
in gold prices?
 Yes
 No
Yes No
12 38
in No
12
Yes
No
38
90
Why there is constant rise in gold prices?

 International market pressure
 Indian Government policies
 Scarcity of Gold
 Illegal regulation in gold trading
International Indian Scarcity of Illegal

market Government Gold regulation
pressure policies in gold
trading
12 20 6 12
in No
12 12
International market pressure

Indian Government policies
Scarcity of Gold
6 Illegal regulation in gold trading
20
91
Is India top gold consumption country?

 Yes
 No
Yes No
46 4
in No
4
Yes
No
46
92
Which region has highest gold consumption?

 East
 West
 North
 South
East West North South

12 6 6 26
in No
12
East
West
26 North
6 South
93
Does the situation of gold buying have led to a recent phenomenon of gold loan?
 Yes
 No
Yes No
40 10
in No
10
Yes
No
40
94
Is gold loan market new to India or it prevailed earlier?

 New
 Prevailed
New Prevailed
48 2
in No
2
New
Prevailed
48
95
What is your perception towards Indian gold loan market?

 Good rise
 Average
Good rise Average

45 5
in No
5
Good rise
Average
45
96
What are the trends do you believe has lead to development of gold loan market?
 Rising prices and pressure on consumer
 Bankers looking for alternatives to regular loan
 Market demand
 Safest loan terms for banks
Rising prices Bankers Market Safest loan

and pressure looking for demand terms for
on consumer alternative banks
to regular
loan
5 13 12 20
in No
5
Rising prices and pressure on

consumer
20
Bankers looking for alternatives
13 to regular loan
Market demand
Safest loan term for banks
12
97
Is gold loan safest instrument for banks?

 Yes
 No
Yes No
39 11
in No
11
Yes
No
39
98
What are the trends that lead consumer going for gold loan?
 Rising commodity prices
 Facilitates liquidity without any pressure or risk
 Easy to obtain and repay
 Household pressure
Rising Facilitates Easy to Household

commodity liquidity obtain and pressure
prices without any repay
pressure or
risk
10 23 6 11
in No
11 10
Rising commodity prices
Facilitates liquidity without any

pressure or risk
Easy to obtain and repay
6
Household pressure
23
99
Is Gold Loan the best loan available today?

 Yes
 No
Yes No
47 3
in No
3
Yes
No
47
100
Do you see trend in gold loan increasing or at stagnant?

 Increasing
 Currently stagnant
Increasing Currently
stagnant
43 7
in No
7
Increasing
Currently stagnant
43
101
Do you see any risk in current trend in gold loaning market?

 Yes
 No
Yes No
2 48
in No
2
Yes
No
48
102
Gold loan – is there any risk per se?

 Yes
 No
Yes No
0 50
in No
0
Yes
No
50
103
Is there any policy for gold loan drafted by government?

 Yes
 No
Yes No
50 0
in No
0
Yes
No
50
104
How do you rate Mannapuram VS other gold loaning companies?

 Very good
 Good
 Average
 Poor
 Very poor
Very Good Good Average Poor Very poor

12 15 3 10 10
in No
10
12
Very Good
Good
Average
Poor
10
Very Poor
15
3
105
Do you see future of gold loan market?

 Yes
 No
Yes No
50 0
in No
0
Yes
No
50
106
What is current estimation of gold loaning market? (Open ended)
1000-2000 CR 2000- 5000-10000 10000 +

5000CR CR
10 23 6 11
in No
3
5
1000-2000 CR
2000-5000 CR
10 5000-10000 CR
10000 CR +
32
107
FOR INVESTOR
Do you have gold loan?
 Yes
 No
Yes No
39 11
in No
11
Yes
No
39
108
From which of the below channel have you purchased gold loan?
 Mannapuram
 Muthoot finance
 Banks
 Any other _______
Mannapuram Muthoot Banks Any other

finance
16 20 12 2
in No
2
12 16
Mannapuram
Muthoot finance
Bank
Any other
20
109
Is this your first gold loan or another?

 First
 Another
First Another
35 4
in No
4
First
Another
35
110
How much amount you have taken as loan?

 >1 Lac
 1 Lac – 5 Lac
 < 5 Lac
>1Lac 1 Lac-5 Lac <5 Lac

10 26 3
in No
2
10
> 1 Lac
1 Lac-5 Lac
< 5 Lac
26
111
What is interest % you are paying?

 <8%
 8% - 10%
 10%-12%
 12%-14%
 >14%
<8% 8%-10% 10%-12% 12%-14% >14%

3 13 20 12 2
in No
2 3
12
13 <8%
8%-10%
10%-12%
12%-14%
>14%
20
112
Is the interest you are paying on Gold Loan is greater than other type of loan?
 Yes
 No
Yes No
31 19
in No
19
Yes
No
31
113
Do you think that getting Gold Loan is faster than any other type of Loan?
 Yes
 No
Yes No
47 3
in No
3
Yes
No
47
114
Do you need to provide any kind of guarantee (except gold) while obtaining Gold Loan?
 Yes
 No
Yes No
0 50
in No
0
Yes
No
50
115
Which of the following Gold Loan Company provides better services related to Gold Loan?
 Manappuram
 Muthoot finance
 Banks
Mannapuram Muthoot Banks Any other

finance
16 18 5 0
in No
0
5
16 Mannapuram
Muthoot finance
Banks
Any other
18
116
Is gold loaning the best loan available today?

 Yes
 No
Yes No
37 13
in No
13
Yes
No
37
117
Do you see growth in the gold loan trend?

 Yes
 No
Yes No
43 7
in No
7
Yes
No
43
118
Do you prefer gold loan against other options?

 Yes
 No
Yes No
47 3
in No
3
Yes
No
47
If yes (why)
 Cheaper interest rate
 Good installment scheme
 Faster loan processing
 Less documentation
If No (why)
 Security issues
 LIC loan is cheaper
119
5.3 CASE STUDY

MUTHOOT SMART PLUS GOLD LOAN
 The benefit of paying back in Equated Monthly Installments
 The EMI is apportioned such that the larger amount goes toward repaying the principal
 No foreclosure charges
 Part release and repledge is allowed
 Rebates on prompt payment
Muthoot Smart plus Gold Loan Documents Original proof of identification: Any of the
following are acceptable:
 Passport
 Govt of India election ID card with address proof
 PAN card with address proof
 Driver’s license
 Any departmental ID card
SMART + GOLD LOAN

 “SMART” 3 MINUTE GOLD LOAN Scheme is an innovative 3 Minute Gold Loan Scheme
with the added benefit of repaying the loan in Equated Monthly Installments.
 Customers can choose any tenure of 6,12,24 and 36 months
 Can be offered to all customers but will be most beneficial to the salaried class.
 The interest rate effectively works out to 13.47% only for a 12 months Scheme.
 Loan up to 90% of the total value of gold is granted.
 No additional documentation or charges are taken for availing loan.
 Unlike banks, there are no security cheques to be given and no advance EMI collected.
 Repayment of installments can be done from any branch
120
Table of repayment of Loan
Amount 6 Month 12 Month 18 Month 24 Month 30 Month 36 Month

10000 1786 946 668 529 447 393
25000 4464 2364 1668 1322 1117 981
50000 8927 4728 3336 2644 2233 1962
100000 17853 9456 6671 5288 4465 3924
200000 35706 18912 13341 10575 8930 7847
500000 89263 47280 33352 26436 22325 19617
1000000 178526 94560 66703 52872 44650 39233
Key features and Benefits of Smart plus Gold Loan

 Loan can be pre-closed any time without any pre-closure charges and calculation of interest will
be similar to normal Gold Loan Scheme.
 Grace period of 3 days is allowed for EMI remittance.
 For default in repayment, penal charges at the rate of 2% for the first month and 3% for the next
5 months are applicable.
 A continuous 6 months default in repayment will result in auction of pledged ornaments.
 The EMI amount received is apportioned in such a manner that the larger amount goes into
repayment of the principal every month
 Principal amount is also getting repaid while servicing the interest, thereby reducing the balance
outstanding.
 Part Release is allowed by doing Re-Pledge with new EMI Schedule.
 A rebate of 2% is given for prompt repayment, payable at the end of the tenure of the loan.
121
5.4 CASE STUDY

GOLD LOAN - A BETTER DEBT OPTION
If you have gold jewellery to offer as collateral for personal loan, procedural hassles are minimal
and banks don't check your credit score. The amount of documentation and the excessive
verifications before your personal loan gets processed can be a nightmare. Here is where your
jewels can lend a hand, specifically gold.
With the current interest rate fluctuations, opting for a jewel loan as against a personal loan is
more lucrative. Not only are your overall costs reduced, this will save a lot of your time. "One of
the major advantages is that the loan is processed almost immediately, within hours, even
minutes at some of the NBFC viz. MANAPPURAM FINANCE, with minimal documentation.
The Credit Information Bureau (India) Ltd scores which reflect an individual's credit history are
beginning to play an important role in acquiring personal loans. However, a jewel loan requires
no such score. While the requisite documents for a jewel loan differ across lenders, most
normally require no more than a proof of income or address.
The clincher: the interest rates between a jewel loan and a personal loan can differ by as much as
5-8 per cent for the same amount loaned. Some lenders charge a nominal fee for processing and
others a small fee as closing charges. Co-operative banks require you to be a member, charges
for which, again, can be as low as Rs 5.
Jewel loans can be availed of at co-operative banks, public sector banks, private sector banks and
other private lenders. Some banks, however, offer it only in certain regions, the only
disadvantage. While private lenders process the loan in less than a couple of hours, some co-
operative and public sector banks may take up to a day to issue the loan. MANAPPURAM
FINANCE is exceptional in this regard as it serves the customer with maximum amount
at minimum time i.e., less than 3 minutes.
In any case, the time is much less than the minimum three days of processing time for a personal
loan. Loan to value or the maximum ratio of a loan's size to the value of the asset, for a jewel
loan is on par with that of a personal loan.
122
The Reserve Bank of India has no strict policy on jewel loans. In late 2012, the RBI had issued a
notification which permitted bullet repayment (a lump sum payment of the principal at maturity)
of gold loans. Subject to specific guidelines from the apex bank, each bank may fix its rate for
gold, reflecting the market price at that point of time.
Care should be exercised if you have defaulted on a loan earlier, be it personal or any other. Your
jewels might not be returned at the end of the loan tenure if you approach the same branch.
Approaching another branch or bank in this case would be one solution, as they would not have
any record of your default history. A State Bank of India official, however, cautioned that some
time in the near future, they would start looking at Cibil scores before approving a jewel loan.
The loan tenure is not uniform across banks. With private lenders like HDFC Bank and some co-
operative banks, the tenure is annual. Non-banking financial companies like Manappuram
Finance have a one-month tenure. But, an advantage with monthly renewals is that the loan value
also increases every month with the appreciation of gold.
At SBI, the individual must repay some amount of the principal along with the interest every
month, as non-repayment for a continuous period of three months will render the loan a non-
performing asset. Considering the advantage a jewel loan offers in terms of a rent-free locker, a
little bit of juggling can even help you save renting a locker for your jewels.
123
5.4 RATIO ANALYSIS
Mannapuram IIFL Muthooth

finance
Mar '12 Mar '12 Mar '12
Return On Capital Employed (%) 13.61 7.58 20.1
Return On Net Worth (%) 18.22 4.95 30.48
Current Ratio 0.97 1.03 1.02
Quick Ratio 15.32 1 4.63
Debt Equity Ratio 2.83 0.01 5.29
Debtors Turnover Ratio -- 2.02 12.27
Asset Turnover Ratio 4.78 0.39 0.29
Dividend Payout Ratio Net Profit 18.4 79.62 19.37
Dividend Payout Ratio Cash Profit 16.5 53.19 18.68
Earning Retention Ratio 81.61 -2.84 80.63
Cash Earning Retention Ratio 83.51 37.36 81.32
124
CHAPTER 6
125
6.1 RISKS TO BORROWERS AND LENDERS

Since lenders take possession of the gold assets in a loan transaction, in case of a theft they may
not have sufficient funds to compensate all the borrowers for their loss in its entirety. This is
more important for loans placed in the unorganized sector; banks/NBFCs usually have better
security and insurance coverage. Furthermore, financial packages cannot compensate for the
personal attachment a borrower has with the gold assets.
Moreover, a sharp decline in gold prices increases the original LTV. A lender may require an
immediate recovery of any amount that exceeds the original LTV ratio, but the borrower may be
unable to pay this amount. Restructuring of the loan may be required in these cases.
Additionally, if the value of the pledged asset declines, a borrower may be more willing to
default on the loan. This poses a serious concentration risk to the lender, especially to the NBFCs
that have a high exposure to gold loans and lend at high LTV ratios.
The increase in gold prices over the last few years, coupled with the surge in gold loan
borrowings during this period, could create a gold bubble which could burst in the event of a
significant correction in gold prices. Banks/NBFCs with significant exposure to gold loans could
face widespread defaults, which could adversely impact the economy.
The organized sector today manages these risks through various methods such as enhanced
security, insurance cover, buying gold futures, etc.
126
6.2 REGULATORY ENVIRONMENT

While there are no means of controlling the unorganized sector, the organized sector of banks
and NBFCs come under the purview of the Reserve Bank of India (RBI) which has norms to
regulate the gold loan market. NBFCs had been traditionally disbursing gold loans through funds
received from banks under priority lending for the agricultural sector. The loans under this
category enjoy an interest rate discount of approximately 200 bps over the normal interest rates
charged by banks. But to reduce the risk in the system, the RBI ruled in February 2012 that bank
credit to NBFCs for lending against gold jewelry will not be treated as exposure to the
agricultural sector. The resulting higher interest rate for funds is expected to promote better
lending practices by NBFCs to creditworthy borrowers.
With the continued rapid growth of the gold loan market in India, RBI has started examining
lenders, especially NBFCs, for possible concentration risks (i.e., risks due to a sharp decline in
the prices of gold for a lender with a large exposure to gold assets pledged against the loans).
All lenders are required to adhere to the KYC norms. NBFCs allegedly have not strictly followed
this regulation and hence have been under the RBI’s scanner for some time now. Currently,
NBFCs’ gold loans are regulated by RBI. However, some state governments require compliance
with relevant state money lending statutes. If the state governments succeed in enforcing this
regulation, the profit margin of NBFCs would be further squeezed.
There have been recent complaints regarding high interest rates and penalty rates charged by
NBFCs. This has caught the attention of regulators; any regulatory move in this regard would
impact the profit margin of NBFCs.
Role of Technology
Information technology has played an increasingly important role in the rapid growth of the gold
loan market.
 Technology provides scalability to gold loan businesses, enabling quick roll-out of branches and
efficient penetration of the underserved markets.
127
• Provision of accurate real-time information has led to faster decision making and reduced
turnaround time for loan disbursals.
• Technology has significantly reduced human intervention and thereby, the approval,
disbursal and repayment processes have become much faster, simpler and more robust. Better
adherence to lending regulations (KYC, priority lending, etc.), consonance in firm-wide
lending activities, efficient tracking of borrower accounts, process transparency and
minimization of operational costs are some of the major benefits realized through the use of
technology.
Gold loan firms use negligible or small-scale proprietary IT systems. These are proving to be
inadequate given gold lenders’ strong growth. Hence, firms are increasingly looking to leverage
technology for further growth. They are engaging enterprise solution providers to provide
integrated solutions for loan origination, servicing and collections.
128
6.3 CONCLUSION
Gold has always been a valued commodity. Particularly in India, it is considered as auspicious,
and used in the form of jewelry, coins and other assets. Due to their high value, people have been
taking loans against gold ornaments for centuries. Till about a decade ago, most of such lending
activities used to take place in the unorganized sector through pawnbrokers and money lenders.
However, the scenario has changed with the entry of organized players.
We accept hypothesis H1 that gold loan market is on expansion mode. For borrowers, gold loans
have emerged as one of the best means of raising quick, short-term capital. For lenders, gold
loans are more advantageous compared with home and car loans because of the shorter tenures,
lower processing time and cost, and greater returns due to higher interest rates. These factors,
along with appreciation in value of gold, have led to an explosion in the gold loan market. With
everyone wanting a piece of this action, the organized sector is challenging the large unorganized
gold loan market dominated by pawnbrokers and moneylenders, with NBFCs leading the pack
due to simpler approval and disbursal processes, flexible products and better accessibility.
An examination of these trends makes clear that banks/NBFCs that aren’t yet into the gold loan
market might find it attractive. This is due to the following factors:
 Better ROI due to lower cost, higher interest rates and strong collateral
 Ability to compensate for lower off-take of car/ home loans
 Scope for cross-sell opportunities in future including other gold-based products
 Opportunity to capture the growing underserved and under-penetrated market
With approximately 65% of the market in rural areas, firms need to develop strategies to target
this segment effectively and provide better accessibility to borrowers. When expanding, firms
need to ensure consonance of services and operations throughout the network. Firms need to
manage risks related to possible sharp fall in gold prices and non-adherence of regulatory norms
and also need to ensure that physical assets are properly valued, stored and documented. Firms
need to invest in technology to better manage the increasing volumes and to reduce risks.
129
With approximately 65% of the market in rural areas, firms need to develop strategies to target
this segment effectively and provide better accessibility to borrowers. When expanding, firms
need to ensure consonance of services and operations throughout the network.
130
6.4 BIBLIOGRAPHY
 Gold loans as an asset class - IFMR Capital
 Gupta, R. S. (2011, March 18). Organized gold loan biz may double this fiscal. Retrieved
April 6, 2011, from Economic times
 The Role of Gold in India, World Gold Council, September, www.gold.org
 Muthoot Finance, NCD Prospectus, Aug 2011
 http://www.neytri.com/gold-loans-what-you-must-know/
 http://thegoldwatcher.blogspot.com/2011/05/indian-gold-loan-market-expanding.html
 http://articles.economictimes.indiatimes.com/2011-09-06/personal-
finance/30119263_1_gold-loans-nbfcs- personal-loan
 http://www.apnapaisa.com/loan/gold-loan-india/rates.html
 http://online.wsj.com/article/SB10001424053111904265504576567780324461332.html
 http://www.thehindu.com/business/Economy/article2376650.ece
 http://banking.contify.com/story/manappuram-finance-signs-10-yr-multi-million-dollar-deal-
with-ibmto-revamp-it-system-2011-07-15
 http://www.ibm.com/news/in/en/2011/07/27/o367559z88357v51.html
 http://telecomtalk.info/muthoot-fincorp-introduces-mobile-loan-powered-by-atom-
technologies/26077/
 http://www.muthootfinance.com/services/gold-loan.html
 http://www.statebankoftravancore.com/Interest_Rate_Loan.htm
 http://www.southindianbank.com/interestRate/interestRateDetails.aspx?irtID=7
 http://www.southindianbank.com/interestRate/interestRateDetails.aspx?irtID=8
 http://www.iob.in/Rates_at_a_glance.aspx
 http://www.iob.in/CCC_jewellery.aspx
 http://indian-bank.com/rate_loan_personal_base.php
 http://indian-bank.com/rate_loan_agri_base.php
 http://www.muthootfincorp.com/faq_goldloan.html
 http://www.muthootfincorp.com/faq_smartplus.html
 http://www.capitalmarket.com/cmedit/PrintStory.asp?SNO=469165&CoverageID=
131
 http://www.asiantribune.com/news/2011/06/09/sri-lanka-commercial-bank-take-gold-loans-
countrywide
 http://www.thenational.ae/lifestyle/personal-finance/unlock-the-equity-behind-your-gold
 http://www.zerohedge.com/news/russian-central-bank-offer-gold-backed-loans-or-why-
spam-standardcoming-
 end
 http://www.thehindubusinessline.com/industry-and-economy/banking/article2711896.ece
132
6.5 ANNEXURE
QUESTIONNAIRE (COMPANY)
Dear Sir/Madam,
I am ROGERY. PETER, from Birla College, Kalyan. As a part of my academic project, I am
studying trends that lead to increase in gold loan scenario in India. Following are some questions
in the same regards. I request you to help me fill the questionnaire. Please tick (√) wherever
applicable.
Name: ___________________________
Designation: __________________________
Occupation:
 Salaried
 Individual business
 Professional
1. How do you rate Indian Gold market in the preview of gold buying?
 Very Good
 Good
 Average
 Poor
 Very poor
2. Do you feel that there is a shift in buying of Gold from consumer?

 Yes
 No
3. Do you feel that Gold phenomenon has become stagnant in India too due to continuous rise
in Gold prices?
133
 Yes
 No
4. Why there is constant rise in Gold prices?

 International market pressure
 Indian Government policies
 Scarcity of Gold
 Illegal regulation in gold trading
5. Is India top Gold consumption country?

 Yes
 No
6. Which region has highest Gold consumption?

 East
 West
 North
 South
7. Does the situation of Gold buying market have led to a recentphenomenon of Gold Loan?
 Yes
 No
8. Is Gold Loan market new to India or it prevailed earlier?

 New
 Prevailed
9. What is your perception towards Indian Gold Loan market?

 Good rise
 Average
134
10. What are the trends do you believe has lead to development of Gold Loan market?
 Rising prices and pressure on consumer
 Bankers looking for alternatives to regular loan
 Market demand
 Safest loan terms for banks
 Any other (_____)
11. Is Gold Loan safest instrument for banks?

 Yes
 No
12. What are the trends that lead consumer going for Gold Loan?
 Rising commodity prices
 Facilitates liquidity without any pressure or risk
 Easy to obtain and repay
 Household pressure
13. Is Gold Loan the best loan available today?

 Yes
 No
14. Do you see trend in Gold Loan increasing or at stagnant?

 Increasing
 Currently stagnant
15. Do you see any risk in current trend in Gold Loan Market?
 Yes
 No
135
16. Gold Loan – is there any risk?

 Yes
 No
17. Is there any policy for Gold Loan framed by the Government?
 Yes
 No
18. How do you rate Manappuram v/s other Gold Loan Companies?
 Very good
 Good
 Average
 Poor
 Very poor
19. Do you see future of Gold Loan market?

 Yes
 No
20. What is current estimation of Gold Loan market? (open ended)
THANK YOU
136
QUESTIONNAIRE
Dear Sir/Madam,
I am ROGER Y. PETER, from Birla College, Kalyan. As a part of my academic project, I am
studying trends that lead to increase in gold loan scenario in India. Following are some questions
in the same regards. I request you to help me fill the questionnaire. Please tick (√) wherever
applicable.
1. Do you have Gold Loan?

 Yes
 No
2. From which of the below channel have you purchased Gold Loan?
 Manappuram
 Muthoot finance
 Banks
3. Is this your first Gold loan or another?

 First
 Another
4. How much amount you have taken as loan?

 >1 Lac
 1 Lac – 5 Lac
 < 5 Lac
5. What is interest % you are paying on Gold Loan?

 < 8%
 8% - 10%
 10% - 12%
137
 12% - 14%
 > 14%
6. Is the interest you are paying on Gold Loan is greater than other type of loan?
 Yes
 No
7. Do you think that getting Gold Loan is faster than any other type of Loan?
 Yes
 No
8. Do you think that procedures related to Gold Loan are less complicated than any other type
of Loan?
 Yes
 No
9. Do you need to provide any kind of guarantee (except gold) while obtaining Gold Loan?
 Yes
 No
10. Which of the following Gold Loan Company provides better services related to Gold Loan?
 Manappuram
 Muthoot finance
 Banks
11. Is Gold Loan the best and easy loan available today?
 Yes
 No
138
12. Do you see growth in the Gold Loan trend?

 Yes
 No
13. Do you prefer Gold Loan against other options?

 Yes
 No
14. If Yes, Why (open ended)
15. If No, Why (open ended)
THANK YOU
139

Project On A Study of Increasing Trend of Gold Loan by Manthan Jogani

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A STUDY OF INCREASING TREND OF GOLD LOAN

“A STUDY OF INCREASING TREND OF GOLD LOAN”

MASTER OF MANAGEMENT STUDIES

SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

MASTER OF MANAGEMENT STUDIES

Shri. Yashwantrao chavan shikshan prasarak mandal’s

SINHGAN INSTITUTE OF BUSINESS MANAGEMENT

ROLL NO. __________

1.2 EXECUTIVE SUMMARY

1.3 ABOUT THE STUDY

2.2 BACKGROUND – GOLD & INDIAN SOCIETY

 Gold is primarily a monetary asset and partly a commodity.

2.3 GOLD THROUGH TIMES

Gold’s Glowing History

"He who hold's the Gold makes the rules ...

2.4 GOLD ECONOMY

2.5 DEMAND & SUPPLY OF GOLD

2.6 GOLD MARKET IN INDIA

The existence of a gold lending/leasing market is a pre-condition for arbitrage-free pricing of

2.7 GOLD AS AN INVESTMENT RATIONALE

However, these three reasons to invest in gold:

Growing Global Demand

Not Linked to Currency

Invest In Gold to Counter Declining Stocks

3.1 GOLD LOAN – BASICS

What are gold Loans?

How can I get a gold Loan?

What are the features of gold loans?

Are gold loans advisable? What are the alternatives?

Do I face any risk that gold prices will move up or down?

3.2 RATIONALE OF GOLD LOAN

Low Interest Rates:

3.3 GOLD LOAN GROWTH

3.4 NBFC SECTOR - OUTLOOK

Outlook for NBFCs

3.5 GOLD LOAN FEATURES

3.6 GOLD LOAN SECTOR

Resplendent Gold Loan market

3.7 MAJOR PLAYERS

Major players and market share

3.8 GOLD LOAN PROCESS

3.9 LOAN INTEREST RATE COMPARISON ACOSS CATEGORIES

3.10 COMPARISM OF GOLD LENDER OFFERING

3.11 GOLD LOANS AID FINANCIAL INCLUSION

Avoids debt trap:

Simple procedures, fast disbursal:

No depreciation of underlying asset:

Suited for the unorganized sector:

3.12 CRITICAL SUCCESS FACTORS FOR GOLD LOAN

3.13 CHANGING CONSUMER PERCEPTION DRIVING

4.1 INDIAINFOLINE – A VIEW

4.1.2 Indiainfoline vision:

The Company received two successive awards during the year:

COMMODITIES AND CURRENCY

CREDIT AND FINANCE

IIFL successfully completed Initial Public Offering of Secured Redeemable Non-Convertible

FINANCIAL PRODUCT DISTRIBUTION

PROPERTY SERVICES AND REAL ESTATE FUND

Real Estate Fund

4.4 INDIAINFOLINE COMMODITIES LTD

Indiainfoline Marketing & Services

Wealth Management Service

Portfolio Management Service