MUMBAI // Last week, the 9 billion rupee (Dh742.9 million) initial public offering of India's largest gold finance company was oversubscribed 25 times.
Market watchers were hardly surprised by the rush of investors.
The scramble took place for shares of Muthoot Finance, a non-banking lender based in Kerala valued at 65bn rupees.
It demonstrates not just surging investor confidence in the company but also the 400bn rupee trade of lending against gold, considered to be one of India's fastest-growing businesses.
The much-awaited initial public offering (IPO) sought to raise 9bn rupees at a price of between 160 rupees and 175 rupees a share. Growth in Muthoot Finance's lending portfolio has hit a 62 per cent over the past four years.
Goldman Sachs, Morgan Stanley, HDFC, Reliance and Birla were among a rush of global bidders for its shares. Analysts say the surging price of gold is one of the reasons for the growing popularity of this business, which has grown about 40 per cent in the past decade, the management consultancy IMaCS says.
The international spot price of gold crossed the US$1,500 mark for the first time last week.
In 2001, 10 grams of gold traded at 4,400 rupees in India. It touched 22,060 rupees for 10 grams last week. The Bombay Bullion Association, a trade group, expects its price to more than double in the next three years.
"The role of gold has changed from a commodity to a monetised asset that encourages consumers to invest in the precious metal," says Ajay Mitra, the managing director of the World Gold Council in India.
Gold loans are considered by many to be one of the safest credit instruments as the business is well regulated and gold is hardly expected to undergo deflation. Interest rates for gold loans are cheaper than most other instruments - typically between 13 and 30 per cent.
Abhinav Chaubey, the chief marketing manager at Muthoot Finance, says gold loans are a "cheaper version of bank loans and credit cards".
Unlike bank loans, there are no penalties for foreclosures. Even so, the instances of default and delinquency that are rampant in the credit card segment are a negligible, "single-digit figure", Mr Chaubey says.
Analysts say the potential for growth is enormous in India, the world's largest market for gold. The country accounts for a fifth of global demand.
About 15,000 tonnes of gold jewellery is squirrelled away in India's private family vaults, according to the global research firm McKinsey. That is almost double the gold reserves maintained by the US Federal Reserve. Indians attach a sentimental value to the yellow metal. It is customarily presented as a gift at weddings and when babies are born. Festivals such as Diwali and Dhanteras are other occasions when Indians typically buy gold.
Because of low banking penetration in rural India, home to 70 per cent of the population, people often prefer to convert their savings into gold as an insurance against inflationary devaluation.
Until a generation ago, a large number of Indians baulked at the idea of pawning gold ornaments. But as the price of the metal climbs to new highs, they are fast relinquishing age-old taboos about using gold as collateral. With growing demand for gold loans, an increasing number of banks such as ICICI, HDFC, State Bank of India, Andhra Bank, and Canara Bank have begun offering loans against the yellow metal in recent years.
"Gold loan companies' profitability will remain strong, driven by high yields, improvement in operating efficiencies, and low credit costs," says Rupali Shanker, the head of the market research company Crisil Ratings.
But increasing competition among players is expected to intensify this year, which could affect growth this year, Ms Shanker says.