In today’s technologically advanced world, lending has reduced the complexity of a time-consuming process from days to minutes. While financial institutions were among the first to adopt digital technologies when the sector was still in its infancy, new-age fintech companies that are transforming the lending experience for borrowers also need to get credit.
We live in a time where there is a much higher level of convenience compared to our previous generations. Services that were once considered normal would now prompt a customer to switch to a competing brand as this is considered a hygiene factor in this day and age. Be it grocery delivery apps, taxi aggregators or OTTs, audiences today expect the highest quality of service from the comfort and convenience of their homes. This has led to a paradigm shift in consumers’ collective expectations about all products and services, including financial services. However, due to their complex nature, financial services require significant modifications and rapid technological changes to meet the expectations of new age consumers.
As the infrastructure between banks and FinTechs is increasingly powered by APIs, microservices, and configurable SaaS products, multiple banking products and services, ranging from opening new accounts and fixed deposits to taking down personal loans and approving credit cards, can become 100 % are built online. Similarly, secured lending products that use a physical asset such as gold as collateral can also be accessed through an app. Look at it from a bank’s perspective: Of the full range of existing retail lending offerings, unsecured lending products such as personal loans and education loans account for 12.8% of the total retail lending portfolio in India, although they are growing rapidly and can easily be digitized based on the CRIF report “How India lendings 2021”.
Meanwhile, asset-backed lending products like gold loans, home loans, and auto loans, which make up a majority of the retail loan book, still depend on physical interactions at the branch. This forces lenders to maintain an expensive branch operation. Not only does this lead to an increase in their Opex/AUM ratio (a key operational metric for bankers), but it also severely limits their ability to expand such offerings to new geographies by establishing new physical branches, unlike other doorstep products or services like e-commerce brands. The Opex/AUM ratio of two of the largest NBFC gold lending players in India ranges from 3.6% to 6% in Q3 FY2022. So, on the one hand, we have consumers who want home-based services, and on the other hand, lenders who want to offer near-risk-free secured lending products like gold loans, but are struggling to find the optimal balance between managing retail stores and branches.
There is a very clear supply and demand gap in the market, which by the way is estimated to be around $50 billion excluding the TAM expansion and considering only the organized sector in India (gold lending market) and the unorganized gold-backed lending market is estimated to be threefold. This is where full-stack gold lending products and services from FinTechs come in. Their moat is the use of technology to manage or automate the operational trinity of lending – front offices (loan managers visit customers rather than branch customer visits), middle offices (app-based auto servicing/distribution centers/support), and back offices (banking, payments, underwriting etc.) using technology.
For consumers, this means a safer, faster and more convenient service. A professional credit manager comes to the customer’s home, examines the gold, books the loan and within 30-40 minutes the funds are deposited into the customer’s bank account. After that, the customer can fully manage the loan via apps. Banks only have to lend the money – fintech platforms take care of the rest. As a result, Indian consumers are increasingly preferring to have their gold pledged in the privacy of their homes rather than risking physically carrying the asset to deposit as collateral at bank branches.
There is a common misconception that borrowers with low credit ratings usually choose gold loans, which in real life is the complete opposite. For a business owner who has gold as a dead asset in the almirah, a gold loan is more prudent than a business loan for two reasons. First, interest rates on gold loans are much lower. Secondly, with gold loans you only have to pay the interest component per month and you can pay back the principal at the very end. For a retailer or manufacturer, this means that the working capital acquired through the loan can be fully used for investments and after realizing the return, the principal amount can be repaid at the end of the loan term.
It is important to remember that regardless of the quantity, gold is an asset owned by over 80% of Indian households. For all players trying to monetize this dead asset, one of which happens to be the Government of India, the target is not a Pareto optimal function! Futuristically, 10 years from now, going to a branch to take out a gold loan might seem just as strange as going to a restaurant to pick up food today.
The views expressed above are the author’s own.
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