From bytes to bullion: The implications of Google Pay's entry into gold loans

Gold has served as an indicator of wealth and security in human history, with gold-based loans or gold as security being among the earliest forms of credit. Civilisations from ancient Mesopotamia to medieval India relied on gold as a universally trusted collateral for borrowing. 

The intrinsic value of gold, which transcends geographical boundaries and economic systems, has allowed gold-backed loans to thrive even in uncertain financial times. In India, gold loans have become especially popular due to the country’s deep cultural connection with gold; according to the World Gold Council, Indian households hold approximately 25,000 tonnes of gold, which amounts to over 40% of the world’s privately held gold reserves. This gold serves as a liquid asset for millions, allowing access to credit during emergencies or financial needs. 

Gold financing, long perceived as a niche segment catering primarily to rural and semi-urban households in India, is now gaining interest from a broader range of players, including Big Tech companies such as Google. Just last week, Google Pay announced a partnership with non-banking financial company (NBFC) Muthoot Finance, which specialises in gold loans. The partnership will provide gold-backed loans to small businesses and consumers across the country through the former. 

Google’s entry into the space comes despite the Reserve Bank of India (RBI) consistently raising concerns about operational gaps and governance standards in gold loan entities. Last year, for instance, it was found that overzealous Bank of Baroda employees looking to hit their lending targets concocted fake gold loan disbursals. In March, the RBI also barred IIFL Finance from sanctioning, disbursing, or selling its gold loans after it found discrepancies in the way the NBFC was assessing the gold provided as collateral. The ban was only lifted in September.

The RBI’s concerns are well-founded. Credit risks around gold will persist because, despite its reputation for long-term stability, gold is not immune to valuation fluctuations in short-term cycles. And coupled with India’s declining savings-to-GDP ratio, the rise of lifestyle-based borrowing, where individuals leverage gold to fund immediate consumption, poses a serious threat to future financial stability. This shift from asset-based saving to borrowing for consumption amplifies the risk of defaults, especially during periods of gold price volatility. 

But despite the central bank’s worries, the sector continues to grow, attracting more participants than ever before. This rise of interest in gold loans by diverse players indicates the potential for this lending vertical and addresses opportunities from a changing consumer demographic and economic reality that cannot be ignored.