Demand for gold loans on the rise as economic woes loom

Gold, a traditional favourite among Indian investors, is proving its worth once again as a source of funds for a growing number of Indians. Low-interest gold loans are meeting the short-term needs of borrowers while reducing risk for lenders.

Demand for gold loans on the rise as economic woes loom

This could well be the financial crisis the older generation warned us about. With the economy grinding  to a halt following the imposition of the lockdown, Indians are turning to the family gold to make ends meet. At a time when banks are hard-pressed to provide credit given the sorry state of their own finances, borrowing against gold may be the only option for millions of Indian households and small businesses on the verge of bankruptcy. Experts say that the rush for gold loans will only increase in the months ahead.

Gold loans: an attractive option

India has traditionally been one of the world’s biggest markets for gold, with 800–900 tonnes imported annually. In fact, 2019 was the first time in recent memory when demand slumped. Faced with the prospect of a pay cut or outright job loss, salaried employees are expected to mortgage gold in large numbers. The price of gold has been steadily increasing over the past several quarters, according to the World Gold Council (WGC), and this makes it more attractive.

Secondly, the volatility of the stock markets amid mutual fund major Franklin Templeton freezing six of its debt schemes has made investors cautious. Though the government has announced measures to stabilise the situation, the event has triggered a wave of withdrawals from the debt and equity markets.

Related: Gold ETFs vs Physical gold: Which one is better? 

There is a broad consensus among policymakers that a larger stimulus package is required to boost social security for low- and middle-income groups as well as support small and medium businesses. Incidentally, it is the first time in 40 years that the Indian economy is experiencing such a contraction.

Though it’s not quite a bolt from the blue – the Indian economy had been slowing throughout 2019 – a full recovery is not expected at least until 2022. The crisis caused by the collapse of the shadow banking sector followed in short order by Yes Bank going under were precipitated by the onset of the COVID-19 pandemic.

The loss to the economy is pegged at Rs 14–15 lakh crore. Given the gravity of the situation, gold loans have emerged as the most viable solution to meet short-term needs for the salaried class.

Related: 13 Commonly asked questions regarding gold loan

What makes gold loans popular

Though the RBI has lowered interest rates at regular intervals, gold loans are cheaper as they reduce the risk for banks and gold finance companies. Since gold is a valuable commodity around the world, loan-seekers can also expect a higher loan amount. 

For those facing a full-blown financial crisis, a loan against gold can be a lifesaver. Gold loans are disbursed much faster than other types of credit as the documentation required is minimal. Besides, there is no need for extensive credit checks. It also provides borrowers an excellent opportunity to rebuild their credit, provided the loan is repaid without delay.

One of the biggest draws for borrowers is the easy repayment terms offered on gold loans. There is a range of repayment plans to choose from, which in turn helps them manage their monthly outgo more comfortably. There are no restrictions on the end-use of the loan amount; it is for the borrower to decide. It also helps that no processing fees are applicable on loans against gold.

Related: Factors that affect gold prices in India 

Anticipating a spurt in business

Gold finance companies have been bulking up their cash reserves in order to meet a steep rise in demand. Some have begun borrowing from the market in anticipation of a 10–15% increase in loan ticket sizes in FY 2020-21. This is because they believe banks and NBFCs will be cautious in lending to applicants without stable credit, forcing borrowers to turn to them. 

Industry watchers also say there will be a marked propensity among consumers to recycle their old gold or even sell it altogether to take advantage of the increase in prices. However, the demand for new gold is expected to drop for the second year in a row, with the WGC expecting trade to fall to a 25-year low. It may be a while before cheer returns to an economy that’s going through one of its toughest times on record. Look at these 5 Myths about gold loans that you shouldn't believe. 

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