Five ways the gold finance industry can embrace regional differences to improve business

During the pandemic, when many loans were put under pressure, the gold finance industry witnessed aggressive growth—driven by participants from the banking industry

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The Indian affinity to gold is well known. Indians have always had a special connection with precious metal. It has been used as a means to store wealth, a hedge against inflation, and a highly liquid asset that can be pledged or easily liquidated. As most of India's gold sits in the form of heirloom jewellery, there is an emotional relationship with Gold. This is why most Indians prefer not to sell it or sell it only as a last resort. However, due to the pandemic-induced economic distress, there was a surge in demand for gold loans. Small businesses and individuals turned to gold loans to keep themselves afloat.

The gold loan industry has always been attractive due to its lower credit eligibility, high liquidity, and because it can be easily used to procure additional capital during exigencies. During the pandemic, when many loans were put under pressure, the gold finance industry witnessed aggressive growth—driven by participants from the banking industry. Public sector banks like SBI witnessed a six-fold increase in gold loans. The sector also saw entries of new digital-only players such as Rupeek and Indel, who are trying to redefine the gold loan market in India. Moreover, gold finance is highly unorganised. The organised sector only comprises 35 percent of the entire market (KPMG, 2020). Therefore, organised players in the gold finance industry have a great opportunity as their cost of raising funds is significantly lower than the participants in the unorganised market. These players have tapped into the huge opportunity and have experienced unprecedented topline growth in the last two decades making many of these companies household names.

Gold loans have grown since they are a safe bet for banks (low LTV), a convenient solution for customers and require very little documentation. The rise in the prices of gold has also resulted in a progressive rise in the average size of gold loans disbursed. As we step into the post-pandemic era, where individuals and businesses are no longer "responding" but "rebuilding", we need to recalibrate the understanding of the gold-finance ecosystem. However, our conversation with business leaders in the industry has revealed that not all states have seen equal enthusiasm towards gold loans. After reviewing the multiple products, we realised that the industry has ignored regional differences and their entire marketing programs (including product, price, promotion, and place) are homogeneous across the country.

India is a continent that masquerades as a country, with each state being culturally different from the other. Individuals in different parts of the country also lead very different lives. These cultural and traditional differences strongly impact their behaviour as consumers. For decades, these regional differences have been ignored by businesses for a "one size fits all" approach. The fact is that countries like Belgium and Netherlands have more in common with one another than some states in India have. But businesses have respected their diversity and designed products that are special for each country.

This brings about the question of whether the time has come for businesses to recognise the differences and design unique products that will help them maximise value for both their clients and shareholders. We interviewed 23 sales associates from different regions of the country and suggest some potential regionalisation strategies for the gold finance industry.

Five ways the gold finance industry can embrace these regional differences and maximise value:

1. Flexible North
In North and Northcentral India, consumers value flexibility and do not like to be bound to procedures. This feeling can be brought about by giving consumers control over the loan's structure or at least a part of it. This will not only increase their willingness to pay for the loan but also their loyalty toward the brand. This opportunity can be provided by giving customers flexibility in loan tenure by offering even one-day loans.

2. Targeting women
Though most of the gold in India is owned by women, only a small percentage approach financial institutions for gold loans. This could be because of the male dominance that persists in Indian culture. However, regions like South and Northeast India are more equitable. Thus financial service institutions must make the environment more friendly for women to bring their business. This can be done by employing more women in these regions. Staff training should also entail gender sensitisation to make the office spaces comfortable for their women colleagues and customers.

3. Utilisation of CSR fund
With Central India being the cornerstone of Hinduism, worshipping nature and protecting the environment is ingrained into people's minds. In the South and East of India, people have shown an inclination to be more people-oriented and care for the wellbeing of others. Contrary to India's central region, they seem to value people over nature. Corporate social responsibility presents companies with a unique opportunity to build a brand and develop a relationship with their customers. Appropriately utilising the funds would help the brand gain goodwill and thereby achieve a higher return on investment even on the funds they deploy toward their CSR initiative.

4. Expectation of quality
South India has better infrastructure, good institutions, and many social welfare schemes. As a result, people expect the public and private sector services to be excellent even if it costs more. Their willingness to pay for these services is more when compared to the rest of the country. Therefore, it is important that service providers focus on etiquettes, faster grievance redressal, and building a good ambience for customers. Even if this means that they would need to be charged a small premium.
          
Our research has shown that the industry's approach to treating India as a homogeneous entity has resulted in a lack of customised approach towards the industry and most players in the gold financing business are leaving money on the table.

Sourav Borah, Assistant Professor, Marketing, IIM Ahmedabad
John Joseph, PGP Student, IIM Ahmedabad
Varun Hooda, PGP Student, IIM Ahmedabad

References:
1.    KPMG (2020), Return of Gold Financiers in India’s Organized Lending Market, KPMG Report 2020