Pre-Budget Expectations from Mr. V. P. Nandakumar, MD & CEO, Manappuram Finance Limited

The one major step we would like to see is the restoration of priority sector lending status for eligible gold loans. In February 2011, the RBI had withdrawn priority sector status to gold loans given by NBFCs. As a result, banks that were earlier refinancing eligible gold loans of NBFCs within their priority sector targets, withdrew the facility. It pushed up our borrowing costs by 150 to 200 bps.

While RBI’s intention was, no doubt, to get banks to lend directly to the priority sector (to bring down the cost to the borrower), the impact was most acutely felt by the common man who depends on gold loans.  A typical gold loan has a ticket size of about Rs.40,000 and is repaid in four to five month’s time. It is used largely by the weaker sections who depend on NBFCs because they lack access to banks. When NBFC interest rates are pushed up, ultimately, the burden falls on them. Incidentally, existing policy recognizes micro-credit—loans up to Rs.50,000 to the poor—as priority sector, and we strongly feel all gold loans that meet this criteria should also be considered priority sector.

It’s not widely recognized but, the fact is, Gold loans drive a fair amount entrepreneurship at the grassroots level. We see a lot of shopkeepers, traders, artisans, self-employed and small business owners – the class of micro-entrepreneurs – who use gold loans for working capital. I am sure they would welcome the prospect of lower interest rates.  Considering that more than 90% of India’s workforce is employed by the unorganized sector, it makes a difference to a large chunk of our population. Further, there is the larger benefit, that by putting more of our gold to beneficial use, we generate economic activity out of what is a dead asset otherwise.