- Date : 01/06/2020
- Read: 3 mins
As banks continue to remain cautious, the surge in gold prices opens up opportunities for small business to find stop gap capital through gold loans
Despite the slew of measures introduced by the Ministry of Finance and Reserve Bank of India to ease liquidity in the market, banks have been reluctant to extend credit to small businesses on account of economic uncertainty.
Many small businesses, shops, restaurants and street vendors are looking to resume business in the orange and green zones, where the lockdown has been eased. They are looking to pledge their gold to restart business that have been left in a limbo since the preventive lockdown was announced in late March.
Gold has always acted as a hedge in times of political and economical uncertainty, hence it is not surprising that the price of the precious metal has shot up by 17.63% in the last six months and about 33.51% over the last one year.
Giving businesses the Midas touch
This uptick in price offers a great advantage to new as well as existing clients of gold loan companies. The maximum Loan to Gold Value Ratio (LGV) as mandated by the government stands at 75%. The increase in gold price correspondingly increases the borrowing capacity of new customers, while existing businesses that have gold pledged now have loans substantially below maximum borrowing capacity.
As per George Alexander Muthoot, Managing Director, Muthoot Finance Ltd., the LGV has come down to about 52% and most of the existing customers have a de-facto credit line with an undrawn LGV on account of the price appreciation.
The collateral based gold loans will help small businesses bridge short term capital requirement and help them stay afloat at least for the next three odd moths till things return to normal.
How gold will continue to shine
As banks and financial institutes continue to remain skittish, experts believe the slowdown will not affect the gold loan business. As this is a collateral debt, gold loan companies are better placed compared to other lenders when it comes to bad loans or Non-Performing Assets (NPAs). As per Mr Muthoot, the demand for gold loans will continue to remain strong for the next two-three quarters.
As per a recent KPMG report, the gold loan market in India is expected to touch Rs 4.62 lakh crore by 2022, growing at a compounded annual growth rate of 13.4%. Read this piece to understand how there is a rise in the demand for gold loans as economic woes loom.