According to the latest periodic labor force survey, the majority of Indian households operate in the informal segment. About 68 percent of non-farm workers were engaged in the informal sector. Among employees in the non-agricultural sector, 71 percent did not have a written employment contract, 54 percent were not entitled to paid holidays, and 50 percent were not entitled to any social security benefits.
Most of these people would find it virtually impossible to obtain a loan from banks, which pushes them towards informal lending channels and pawn shops. Banks and other institutional lenders are stuck with inflexible risk underwriting practices and find it difficult to extend credit to those at the bottom of the pyramid, denying them the opportunity to play their assigned role in a business environment. growing economy. Keep in mind that of the 68 percent engaged in the informal non-farm sector, most (71 percent) do not have a written employment contract. This represents almost 48 percent of the total labor force!
Innovation is the key to meeting the challenges encountered in granting credit to this category of borrowers. Microfinance loans are perhaps the only large-scale lending mechanism that has solved the underwriting problems to some extent through the group lending structure. The RBI also recognized the contributions made by MFIs in building credit to those at the bottom of the economic pyramid and increased the income limit for borrowers from Rs 1 lakh per year to Rs 1.25 lakh ( for rural areas) and from Rs 1.6 lakh to Rs 2 lakh per year for urban and semi-urban areas. Likewise, the loan limit for microfinance institutions has been raised to Rs 1.25 lakh, from the previous limit of Rs 1 lakh.
However, one of these innovative products has not benefited from the advantages of a relaxed regulatory position, namely microcredits. There are a few new age lenders who aim to serve these borrowers using data and technological advancements. Gold Lending NBFCs have been serving this segment for years as it is a product particularly suited to borrowers who do not have documentary evidence of their regular cash flow. It gives them the freedom to monetize household gold deposits and offers them cash when needed.
With the widespread use of mobile and data, people have started to carry out transactions for their daily needs through the smartphone. The gold lending product has also evolved over the years and prepared for the future. With cell phones and 24/7 internet access, gold loans can now be used online with money instantly transferred to your bank account. Online gold lending (OGL) offers an overdraft as and when required. The best part about this arrangement is that you don’t have to go to a branch anymore.
Customers can apply for a loan for gold to be delivered to their door by text message or via a mobile app with the touch of a finger. Once the OGL account is opened, they can withdraw money directly to their bank account to pay IMEs or other dues. Once your overdue debts are in hand, the bill can be settled just as easily. In fact, with the ease of overdraft, an OGL offers a great alternative to holding cash at home since it has no restrictions on the number of times a customer may want to borrow or repay. There is also no prepayment penalty.
The main utility of a gold loan for those in the unorganized sector with irregular income is its ability to bridge cash flow imbalances, to cope until expected funds are in hand. In such cases, one could borrow against his gold jewelry to pay the dues. Loan amounts can be as low as Rs 1,000. Gold loans can be used for any period required and interest is only paid for the specific number of days the money is borrowed for, which makes it more practical.
In summary, a gold loan is like a credit card for people working in the unorganized sector, which gives them money whenever they need it. In addition, the experience of gold loans helps build a good credit rating that can come in handy later when applying for a car loan, a mortgage or even a personal loan.
By, VP Nandakumar is MD and CEO of Manappuram Finance Ltd.