As per the latest Periodic Labour Force Survey, the majority of Indian households operate in the informal segment. About 68 per cent of the non-crop growing workers were engaged in the informal sector. Among regular wage/salaried employees in the non-agriculture sector, 71 per cent had no written job contract, 54 per cent were not eligible for paid leave, and 50 per cent were not eligible for any social security benefit.
Most of these people would find it next to impossible to get any loan from banks, which pushes them towards informal lending channels and moneylenders. Banks and other institutional lenders are stuck with inflexible risk underwriting practices and find it challenging to deliver credit to those at the bottom of the pyramid, effectively denying them the opportunity to play their assigned role in a growing economy. Bear in mind that of the 68 per cent engaged in the non-crop growing informal sector, most (71 per cent) don't have a written job contract. That accounts for nearly 48 per cent of the total working population!
Innovation is the key to addressing the challenges faced in extending credit to this class of borrowers. Microfinance lending is perhaps the only large scale lending mechanism which has addressed the underwriting challenges to some extent through the group lending structure. RBI too acknowledged the contributions made by MFIs in strengthening credit to those at the bottom of the economic pyramid and increased the income limit for borrowers from the earlier Rs 1 lakh per annum to Rs 1.25 lakh (for rural areas) and from Rs 1.6 lakh to Rs 2 lakh per annum for urban and semi-urban areas. Likewise, the lending cap for microfinance institutions was raised to Rs 1.25 lakh, against the earlier limit of Rs 1 lakh.
However, one such innovative product has not received the benefits of a relaxed regulatory stance and that is microloans. There are a few new-age lenders who aim to serve these borrowers utilizing data and technological advancements. Gold loan NBFCs have been serving this segment for years as this is one product especially suited for borrowers who do not have documentary evidence of their regular cash flows. It gives them the liberty to monetize household gold deposits and offers them ready cash in moments of need.
With the spread of mobile and data usage, people have begun to carry out transactions for their day-to-day needs over the smartphone. The gold loan product has also evolved over the years and made itself future-ready. With mobile phones and 24×7 access to the internet, gold loans can now be availed online with money transferred to your bank account instantaneously. The online gold loan (OGL) offers an overdraft as and when needed. The best part of this arrangement is that one does not have to travel to a branch anymore.
Customers can ask for a loan against gold to be delivered at their doorsteps through text message or through a mobile app at the flick of a finger. Once the OGL account is opened, they can withdraw money directly to their bank account to pay EMIs or other dues. Once your pending receivables are in hand, the account can be settled just as easily. In fact, with the overdraft facility, an OGL offers an excellent alternative to holding cash at home since it does not have any restrictions on the number of times a customer may want to borrow or repay. There is no prepayment penalty either.
The primary utility of a gold loan for those in the unorganized sector with irregular earnings lies in its ability to bridge cash flow mismatches, to tide over things until the expected funds are in hand. In such cases, one could borrow against one's gold jewelry to clear dues. Loan amounts can be as low as Rs 1,000. Gold loans can be availed for any required period and interest is paid only for the precise number of days that the money is borrowed for, which makes it most convenient.
Summing up, a gold loan is like a credit card for people working in the unorganized sector, which gives them money whenever they need it. Moreover, the experience with gold loans helps to build up a good credit score which can come in handy later on when one applies for a vehicle loan, a home loan, or even a personal loan.
By, V.P. Nandakumar is MD and CEO of Manappuram Finance Ltd.