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October 15, 2009

Why Gold Loans are shining bright

The New York Times has an article on why Gold Loans are far from being anachronistic in India. So much so that international PE/VC firms like Sequoia Capital are invested into Gold financing companies.
Pawnbrokers and money lenders have long operated in India’s back alleys, making loans against jewelry to families in distress, at interest rates of 30 percent or more. But gold loans made by banks and finance companies are different. Rates are lower — 14 to 30 percent — and their businesses are regulated.

...Manappuram, a pioneer in the business, made $730 million in gold loans last year — up from $397 million a year earlier. Muthoot Finance, a privately held firm, says its lending is growing at 60 percent a year. By contrast, total outstanding bank loans to the private sector increased 16 percent last year, year over year, and have been essentially flat so far this year.

...Gold loans, so far at least, have very low defaults — companies say fewer than 1 percent of borrowers fail to repay. Most jewelry is reclaimed in less than four months....Executives say their business has grown because new financing methods and economic liberalization have made it easier for them to raise money. Securitization has made it possible for lenders here to quickly “redeploy” money.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at