Postcard from… India

India’s financial sector can be as chaotic as a Mumbai street market. But when I recently visited India and looked beyond the noisy headlines, I felt excited about the attractive investment opportunities that were created by the liquidity crisis which started last September.

This is a fateful period for India, as the country goes to the polls through April and May in the world’s largest democratic election. Prime Minister Narendra Modi is campaigning for reelection, boasting a reduction in government corruption, a powerful annual GDP growth rate of about 7% and a record of economic reforms.

Reforms in the financial sector, however, have delivered mixed results. Every so often, India still faces a liquidity crisis. Most recently, last September, tightening liquidity hit non-bank finance companies (NBFCs) and housing finance companies (HFCs).

It’s easy to understand why investors get spooked. But in fact, the Indian financial sector is very diversified. Some companies simply aren’t affected by these liquidity crunches—and deserve a closer look when financial stocks are falling.

That’s exactly what we did. Over the last couple of months, we visited about 15 Indian financial firms, as well as newspaper editors, political commentators and government officials, to get the inside story.

After exploring the sector, gold lenders stood out for us. Why? Because, unlike other financials, they aren’t vulnerable to credit and interest-rate risks. When these firms lend money, they hold on to the gold jewelry as collateral, which can be auctioned off in a liquid market in case of default. What’s more, the loans are generally quite small and short-term—usually just three- to six-month terms—so borrowers are relatively insensitive to loan pricing.

We met with one gold lender in Mumbai who explained how it works: borrowers, he said, use these loans like revolving credit card finance, to support investments in farming and cottage-industry activities, and for consumption. India’s gold holdings are several times larger than banking system deposits. So gold lenders play an important role in channeling India’s gold wealth into the real economy.