D

STUDY OF GOLD BUYING AND ITS IMPACT AND STUDY OF GOLD LOANS

EFFORTS BY:

OVERVIEW

India produces approx 4tons of the gold and the rest 800-900 tons is imported.

As on January 2015 India’s holding is 557.7 tonnes which is 6.6% of forex reserves.

On the global front, India is the largest consumer of gold. India accounts for more than 30 per cent of the global gold market.

FACTORS AFFECTING GOLD PRICES• A History of Holding Its Value• Weakness of the U.S. Dollar• Inflation• Deflation• Supply Constraints• Increasing Demand• Portfolio Diversification

BREAK-UP OF HOUSEHOLD ASSETS

IMPACT1. The increasing current account deficit (CAD).

2. Misallocation of capital.

3. The import duty on Gold went up from 4% at the starting of this year to 10% step by step in 2013. In 2014, India maintained the import duty at 10%.

4. Less investment in stock market.

ACTION TAKEN BY RBI

1. The RBI thinks that a CAD of 2.5 per cent of the GDP is sustainable.

2. Against this, India’s CAD in 2011-12 was 4.2 per cent of GDP and in the last quarter i.e. October- December 2012 was 6.7 per cent of GDP.

3. On the quantitative front, RBI introduced the 80:20.

ACTION TAKEN BY CENTRAL GOVERNMENT

• The government has tried to tackle the problem, raising import taxes and considering changing regulations so that less gold comes into India via the banking system.

• Gold imports have fallen sharply to $650 million in August 2013 on account of a slew of steps taken by government to curb inbound shipments of the precious metal.

• Gold imports are estimated to have declined by 41 per cent to 500 tonnes in 2012-13 financial year on account of curbs imposed by the government.

AN OVERVIEW OF INDIAN GOLD LOAN MARKET

India is estimated to possess about 11% of the global gold stock.

India has one of the highest saving rates i.e. 28% of the total GDP, in the world out of which one-third is invested in gold.

It is estimated that 10% of the country’s gold stock is pledged as collateral for loans.

SPECIFICATIONS OF GOLD LOAN1) Secured.

2) Multi-Purpose.

3) Low Disbursal Time.

4) High Loan to Value Ratio.

5) Shorter loan tenures.

6) Varied interest rates.

7) Multiple repayment options.

KEY BENEFITS OF GOLD LOAN1. Avoids debt trap.

2. Simple procedures and fast disbursal.

3. No depriciation of underlying asset.

4. In practise,without recourse.

5. KYC norms.

6. Suited for the unorganised sector.

7. Gains for the wider economy.

RISK ASSOCIATED WITH THE GOLD LOAN

1) Price fluctuation of gold loan.2) The growth of the gold loan is concentrated in South

India.3) Growing competition.4) Change in policy and norms.5) Margin of loan against gold.6) Lack of transparency.7) Complaint against some NBFCs.

KEY DRIVERS OF GOLD LOAN MARKET IN INDIA

•Organised Market: Banks

NBFCs( Non Banking Financial Companies)

•Unorganised Market: Private Moneylenders Pawnbrokers

SUCCESS STORY OF INDIAN COMPANIES

The business of lending money at usurious rates against the collateral of gold is booming.

The two companies that grown very fast are: 1. Muthoot Finance (CAGR 33%-73%)

2. Manappuram Finance (CAGR 5%-26%)

GOLD LOAN AND ITS IMPACT ON INDIAN ECONOMYOrganized gold loan market in India grew at a CAGR of 40% between 2002 and 2010, and is poised to expand 33-41% in 2011.

The value of gold stock in India has grown at 22% CAGR in 2002-2010.

Only 10% of privately held gold in the country is in the loan market.

Of the 10%, only around 25% is in the organized market.

Gold loan is safe for Indian Economy because it is a financial product offered by the banks and NBFCs which work under the limitation of regulatory body.

STEPS TAKEN BY RBI TO REGULATE GOLD LOANS February 2011

1. The RBI removed priority sector status from gold loan companies,

March 2012

2. Loan to value (LTV) ratio not to exceed 60 percent for loans granted against the collateral of gold jewellery.Recently, has been changed to 70percent (January,2014) .

3. Percentage of gold loans to total assets to be disclosed in balance sheets.

4. Loans not to be granted against bullion, primary gold, gold coins.

5. Tier I capital requirement (currently 10 percent) raised to 12 percent by April 1, 2014 for gold loan NBFCs (where such loans comprise 50 percent or more of their financial assets).

CONCLUSION • The financial crisis rocked global markets at the end of

2008. a trend started to develop enticing regular investors allocating a certain amount of their portfolios into gold.

• Gold is a hedge against all kinds of uncertainties.

• However, the government needs to take strict measures to control the increasing prices of gold and help investors overcome the losses due to uncertainties in other markets.

• The combined impact has served to widen the CAD.

CONCLUSIONFor borrowers, gold loans have emerged as one of the best means of raising quick, short-term capital.

Gold loans were preferred over conventional personal loans due to less procedures, fast disbursement and easy installments.

The role of gold loans in inducing gold imports is limited.

REFERENCESMuthoot Finance, NCD Prospectus, Aug 2011.

Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs (January 2012). Gold Demand Trend third quarter 2013 by Word Gold Council.

Financial Statement from Economic Times 2013.

http://articles.economictimes.indiatimes.com/2011-06-03/personal-finance/29617389_1_gold-loan-goldprices-loan-size

www.rbi.org

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