India's gold loan market is poised for significant growth as prices rise, with the unorganized sector accounting for 63% of the market, according to PwC.

New Delhi, India, August 24: India's gold loan market is on the verge of substantial expansion, fueled by rising gold prices per gram and growing customer demand. Currently, the market is primarily dominated by the unorganized sector, which holds a 63% share, while the organized sector, including banks and Non-Banking Financial Companies (NBFCs), comprises the remaining 37%, as per a PwC report.

This scenario presents a significant opportunity for organized players to expand their presence and capture a larger market share.

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

With gold loan market penetration in India at only 5.6%, there is substantial untapped potential within household gold holdings. Although not all gold is available for pledging—due to reasons such as religious significance, emotional attachment, or lack of financial need—there remains significant growth potential in the gold loan sector.

Historically, the unorganized sector has dominated India's gold loan market. However, in recent years, organized players, particularly NBFCs, have started gaining market share.

Banks are also making progress, especially in retail gold loans and agricultural gold loans. This trend is expected to continue as organized players utilize their formal lending structures, transparency, and customer trust to increase their market share.

Shaji Varghese, CEO of Muthoot FinCorp Limited, stated, "Gold loan assets have been growing steadily, and the potential for further growth is high, given that a major part of the country's gold loan market is still in the unorganized sector. Gold prices have been rising over the years, and there is also a shift in how gold is perceived today. Traditionally, gold was purchased for historical, cultural, and societal reasons, and while that continues, people have started buying gold as an investment and as a convenient way to raise funds for financial needs."

India remains one of the largest consumers of gold globally, with total demand reaching 747 tonnes in 2023. However, this marked a 3% decrease compared to the previous year, primarily due to the surge in gold prices, which dampened demand for gold jewelry.

Between November 2023 and May 2024, the price of gold in India rose from Rs 55,375 to Rs 66,532 per 10 grams (22 carats), leading to a shift towards lighter or lower-carat jewelry.

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

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

V.P. Nandakumar, Managing Director and CEO of Manappuram Finance Ltd, remarked, "Recently, the sharp increase in gold prices has brought some stability to the gold loan portfolios of most players, and we do not expect gold prices to decrease due to geopolitical factors, the accumulation of gold by central banks, and the lasting allure of the yellow metal."

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