Financial Inclusion and the Elephant in the Room : V.P. Nandakumar

That financial inclusion is a cause dear to our heart is stating the obvious. After all, there’s so much talk about it. Unfortunately, behind the talk, there’s an elephant in the room that nobody wants to see.

Consider these simple facts. India holds the world’s largest stock of private gold, estimated anywhere between 15,000 to 20,000 tonnes, and this is well known. Less well known is that rural India holds about 65 percent of this gold, and that the poorer and financially excluded classes also own gold in significant measure. Actually, this should be no surprise for two good reasons. Our social and cultural milieu attaches great importance to gold making it a necessity even to the poor. Further, for the millions lacking access to the formal banking sector, gold is the only outlet for their savings.

How is it, then, that gold loans never find mention in the discourse around financial inclusion? Quite simply, it’s because gold loans are the elephant in the room no one wants to see.

Gold loans and financial inclusion

S.P. Rajeshwari is a young woman with two small kids in Devakottai (Tamil Nadu) who is separated from her husband. Having trained as a tailor, she took support from her father and brothers and set up a tailoring establishment with the name, “SPR Raji Tailoring.” Soon, her reputation for quality workmanship grew and the orders began pouring in. She now took on an adjacent shop and set up a full-fledged workshop by employing tailoring assistants who stitch according to her cut and design. Once again, she did well. She attributes her success to the fact that she is the best tailor in town.

However, in 2012, when she decided press ahead with a churidar showroom to complement her tailoring business, the investment required was more than what she could spare. But she did not lose hope. Like most women in India, she had some gold jewellery of her own. With the Manappuram branch close by, she took the plunge and pledged her jewellery. She borrowed about Rs.5 lakhs in August 2012 and boldly went on with the launch of the new showroom. It turned out to be a smart move. The new venture is also doing well, and she has been able to repay much of the loan.

Rajeshwari is just one among many real-life examples that demonstrate how gold loans actually lower the entry barriers to micro-entrepreneurship, much in the way the advent of mobile telephones made things easier for small businesses and services. Prior to the telecom revolution, the cost of renting a shop or office space, and waiting for the telephone connection to materialise was a huge stumbling block to the common man who wanted to start off on his own. Now, with a mobile phone, anyone can operate from home and be in business overnight. Similarly, many have dreams of starting something on their own but arranging for adequate working capital is a major hurdle. With access to hassle-free gold loans, they can get going immediately, without having to go chasing after a bank.

Besides, if you are not educated and have never dealt with a bank before, gold loans ease your entry to the formal banking sector. You become familiar with the formalities involved in dealing with a financial institution, like documentation and KYC norms. Once you’re comfortable at this level, it’s easier to graduate to a regular bank where paperwork is more involved. In contrast, expecting someone who’s never dealt with a formal setup before to straightaway demand a loan at a bank is unrealistic.

By its very nature gold loans deter frivolous borrowings. Because you part with a security to which the family is emotionally connected, the decision to borrow is never taken lightly. Consequently, default rates in gold loans are among the lowest for any category of loans. It serves as an early grounding in responsible borrowing. At the cost of appearing old-fashioned, it may also be said that efforts to uplift the economically depressed classes necessarily begin with a sense of responsibility in the beneficiary. No development activity delivers permanent gains when it stands reduced to an exercise where a continuous stream of benefits is passively accepted by beneficiaries.

Besides, there’s also strong anecdotal evidence that gold loan NBFCs contribute, directly and indirectly, to bringing down interest rates in the unorganised sector. When a gold loan company enters a new market, interest rates charged by local moneylenders are forced down, a direct outcome of the increased competition sparked off by the arrival of an organised player. It actually benefits the poor who, to this day, depend on these moneylenders.

Win-win

From the point of view of the lender, high rates of repayment keep a check on loan losses and ensure there’s no erosion of capital. When gold loans are delivered through a low-cost model—as pioneered by the gold loan NBFCs—there’s also reasonable profits to be made. The upshot is that gold loans can be used to advance inclusion without need for explicit subsidies from the government, and the low cost model can be scaled up rapidly to cover ever more beneficiaries. In contrast, alternative approaches to financial inclusion—for example, the targeted lending programmes—are seen as money losing propositions, sustained only with coercion from above.

Of course, gold loans have a limitation that benefits go only to those who own gold. But even this is helpful to the larger cause because resources, and more focussed attention, can now be diverted to the section that owns no gold, in other words, the most vulnerable of the lot.

V.P. Nandakumar is MD & CEO of Manappuram Finance Ltd.