How Gold Loan NBFCs Can Fuel MSMEs’ Financing Needs

The Micro, Small and Medium Enterprise (MSME) sector has always been the backbone of the Indian Economy. India has the largest MSME base after China. The MSME industry in India manufactures over 6000 products ranging from traditional handicraft products to hi-tech goods. A significant part of the production of big industries is outsourced to the MSME sector in India as well. In fact, like in most low-income countries where MSMEs collectively account for the largest share of employment, the micro sector with over 6 crore enterprises is estimated to account for 97% of the total employment in industry in India. The MSME sector contributes to over 28% of India’s GDP and 40% of the country’s overall exports.

However, despite being an indispensable part of the Indian economy, MSMEs, especially micro and small enterprises face severe challenges in accessing finance and capital and other risk management tools such as savings and insurance from established nationalised and private sector banks. This severely restricts and stifles their growth. This is regrettable considering the role MSMEs play in increasing labour and employment and their contribution to the economy.

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Fortunately, however, the recent years have seen several Non-Banking Financial Companies offering funding to MSMEs through personal loans, business loans and gold loans. In this blog, we look at how the gold loan NBFCs provide to MSMEs can fuel the growth and expansion of this sector, so vital to the Indian economy.

Gold has a special place in the heart of the average Indian. It is often a mandatory item to be gifted or exchanged during auspicious occasions such as births and marriages in many Indian cultures. In addition, despite the sometimes erratic and unpredictable swings in gold prices, gold is considered a relatively stable investment. Thus, according to the World Gold Council, the stock of gold in Indian households was estimated to be 21,000 tonnes in 2021. This was more than the World Bank Gold Reserves!

The Gold Loan offers several advantages to MSMEs, especially those in underserved interior areas, who till recently had to recourse to informal credit systems of money-lenders charging exorbitant rates of interest. Being a secured loan the rates of interest on loans with a collateral of Gold, NBFCs offer is much less than the interest rate on unsecured loans such as personal loans and unsecured business loans.

By offering the convenience of an instant gold loan, NBFCs have made it extremely convenient for busy MSME proprietors in far-flung areas to access finance. Most NBFCs offer gold loans online where prospective borrowers can apply for a gold loan at any time, anywhere. The NBFC thereafter sends a representative for valuation and collection of the gold to be deposited as collateral. Following the signing of the agreement, the loan amount is transferred almost instantaneously to the borrower's account. The penetration of internet and mobile telephony into interior rural areas has also increased the ease by which the MSME sector operating in remote and far flung areas can now access credit from registered financial institutions through the gold loan product.

Thus, while most loans from nationalised and private sector banks involve significant amounts of paperwork and processing time, gold loans offered to MSMEs require minimal paperwork and processing time. In fact, the only two mandatory documents that an MSME or any borrower needs to submit while applying for a gold loan is a proof of address and a proof of identity. In addition, as gold loans are offered to borrowers without a mandatory requirement of a good credit score, it becomes more accessible to small entrepreneurs from the MSME sector who may not have a credit record available with credit rating agencies operating in India

The additional advantage of a gold loan for MSMEs is the flexible repayment terms. Borrowers may choose to service the loan through regular EMIs, or pay only the interest in regular installments, or even choose to repay the entire principal and interest together at the end of the loan tenure. In addition, gold loans offered by NBFCs such as IIFL have no maximum limit. The loan amount is dependent on standard factors that affect the value of the gold loan offered by all standard banks and NBFCs - the weight of gold deposited, the prevailing price of gold in the market, the purity of the gold, and the Loan to Value ratio. One can get a quick estimate of the loan that you can avail against gold by using an online gold calculator.

The MSME sector in India has been showing a sustained growth rate exceeding 10% over the last few years, despite the tough and competitive global environment in which they operate and their limited access to finance from Nationalised and private sector banks. The gold loan facility offered by NBFCs will be instrumental in maintaining and accelerating this momentum in the days ahead.