Reinventing gold loans – have banks found the silver bullet?

When Manjunath, a 30-year-old college dropout who runs his own furniture workshop in Bangalore, got a massive order from a tech firm to kit out their new office at a nearby software park, he turned to his family’s collection of gold jewellery for working capital.

He didn’t have the time, nor the relationship, to get the credit he needed from a bank to quickly order raw materials. When he heard about Rupeek, he downloaded their app – and in a few short clicks applied for a gold loan and arranged for a home-visit from the company that same day to value his family jewellery. A Rupeek employee turned up that afternoon, ran an e-KYC check and assessed the purity of Rajeev’s gold with propriety computer-vision hardware. The data was relayed to a partner bank in real time, which offered Rajiv a larger loan value against his gold than competing banks — at a much lower interest rate than competing NBFCs. Half an hour later, the funds were in Rajiv’s account, even before the Rupeek employee left his home. When he was paid by the tech firm for his furniture six months later, he repaid his loan via the app and his jewellery was delivered back home. It was a seamless experience that delivered a massive business impact.

Many fintech companies are focussed on disrupting banks, but there’s a massive opportunity to collaborate with banks, leverage their balance sheets, to build innovative solutions that address real market needs. Bangalore based Rupeek, which is bringing an Amazon-like experience to India’s gold loan market, is a great example of how nimble fintech companies leverage the strength of banks to create new opportunities in spaces that are hard for traditional players to reach.

Building fintech solutions to bridge gaps for banks

Rupeek was founded in 2015 by Sumit Maniyar with a mission to unlock the economic potential of India’s large stash of gold, which sits in safes and deposit boxes all over the country — earning a zero return for consumers and adding a massive drag on the country’s economy. India is one of the world’s largest importers of gold, but over 90% of the country’s gold is idle. Sumit believes India could add to significantly to its GDP by monetizing the gold stashed in consumer’s homes.

Sumit built Rupeek based on a couple key market insights. First, there’s a stigma around ‘pawning’ the family’s jewellery to take out a loan; discretion and security are key to removing that barrier, which doorstep delivery enabled. Second, the gold loan market needs to be modernized before it can fulfil its potential. Market estimates suggest only one-third of India’s $128 billion (AUM) gold loan market is organized, or serviced by banks, NBFCs and cooperatives; the majority remains in the hands of money lenders and informal sector. Although the private sector banks enjoy a lower cost of capital they face structural barriers such as limited geographic distribution (gold loan enabled branches), gold appraisal capability and regulatory limitations that make it hard for them to compete with NBFCs.

NBFCs that focus on gold loans, like Muthoot and Manappuram, which together have over 7,500 branches, have built large distribution channels and created significant scale over the last couple decades by offering consumers speed and convenience. NBFCs have grown to 26% of the market and are continuing to grow at 1.5x the market average.

Banks are hobbled in a couple of ways. Unlike single-product NBFCs, banks that have multiple product mandates need to build larger, full-service branches, and lower geographical distribution compared to NBFCs. Banks are also far more conservative on loan-to-value (LTV) ratios, due to both tight regulations and internal bank policies.

What traditional banks do have in their favour is lower cost of capital compared to NBFCs. But a lower-interest loan doesn’t always sway consumers. NBFCs have flourished on the fact that customers want to maximize the value of loan against their gold with the fastest disbursement. Retail gold loan customers are surprisingly rate agnostic. Well, not actually surprising, really. This has been consistently observed across multiple loan products – speed, loan size and frictionless experience seem to trump economics, especially in shorter tenure loans. This neutralizes the biggest advantage banks have – their low cost of capital – and makes them relatively uncompetitive versus focused NBFCs.

Sumit realized the very advantage that NBFCs had in serving retail demand through quick service-focused retail distribution channels potentially short-changed the needs of a small business owners, who are borrowing larger amounts and are more rate sensitive. He also realized that was an important segment of demand. When we first met, he had some back-of-the-napkin calculations showing that loans over $3000, which could largely be attributed to small business owners which account for less than 30% of the customer base for NBFCs but contributed more than 70% of the loan book. While banks had lower-priced products for higher-sized loans, they were simply not optimized to deliver quick turnaround time and higher loan-to-value ratio.

This got him thinking about a small business focused alternative and resulted in the birth of Rupeek as a “loan-at-your-doorstep” model designed to level the playing field for banks — and deliver better service, and lower rates, for SME borrowers.

In 2018, when I met the CEO of Federal Bank for a coffee and discussed banks vs NBFCs, we talked about how Rupeek could help banks compete with NBFCs. He immediately saw this could be a game changer, and Federal Bank became the first bank to join Rupeek’s platform. Today, Rupeek is working with four banks across ten cities, and is now onboarding three more partners to help drive regional reach.

A gold star on PMF

Rupeek’s unique, technology-based solution for gold loan distribution has three components: online/mobile based customer acquisition, which is entirely ‘branch free’; assaying gold at the borrower’s home, which provides the most discrete and convenient way to borrow; and lower-than-market interest rates, which they’ve achieved by partnering with banks to directly book the loans on their balance-sheets.

The product-market fit and customer love Rupeek has seen is terrific, and the company is scaling disbursements at a scorching pace on behalf of their partner banks. Rupeek’s monthly disbursements are up more than 10x year on year and AUMs are reaching several hundred crores.

Over the last couple of years, there’s been increasing noise around how fintech startups are going to attack and eat banking market-cap and how banks are going to be disrupted. While we are believers in the massive opportunity that fintech startups can tap into, we also believe this is not a zero-sum game. It is likely that there will be a breed of innovative fintech companies that will ride on the bank’s infrastructure/distribution and balance sheets to build better solutions for the consumer thereby creating a win-win for all involved. Rupeek’s approach is an excellent example of how fintech firms can work collaboratively with banks to build innovative solutions create more efficiencies in the market.

For now, Rupeek’s bank partners do believe they have the silver bullet to take the fight to the NBFCs and garner a larger share of the gold loan market. As an early and committed partner, we are rooting for their success!

This column was originally published on LinkedIn.