Gold loans surge again: Families, small biz pawning assets

Gold loans that have often been equated with signs of stress in households are rising fast, especially from rural and semi-urban regions before the festive season, with a clear trend among individuals and small businesses to leverage their assets to generate funds in the midst of an overall credit crunch, The Economic Times has reported.
There is a beeline for pledging the yellow metal, gold loan companies have said. The report even puts the surge in demand against the backdrop of rally in prices of the precious metal after the Israel-Hamas conflict breaking out in West Asia.

Incidentally, gold loans witnessed a surge during the pandemic when thousands and thousands of common families, facing extreme financial crisis, pulled out their gold holdings and pawned it for cash. Responding to the crisis, the RBI also raised the loan-to-value to 90% from 75% to help families in distress.

“There is completely no fear of Covid in this year’s festive season. So, people want to splurge,” Thomas John Muthoot, chairman and managing director, Muthoot Fincorp told the newspaper.

However, the erratic monsoon in some regions of the country that impacted the income of rural people could have also compelled many to pawn family assets.

Since the outbreak of conflict in West Aisa, gold prices have been on a march. The price of 24-carat gold is about Rs 59,100 per 10 gm, which is a good 18% higher than a year-ago price line of Rs 50,060.

“We are anticipating pent-up demand for gold loans at least 20% more than last year’s festive season. Whenever the gold price increases, there has always been a positive impact on the gold loan business,” said Umesh Mohanan, executive director and CEO of Indel Money, an NBFC.

Reserve Bank data put outstanding gold loans at Rs 95,476 crore on July 28 this year. The figure is a sharp 23.1% up from a year earlier. It also reflects an acceleration from a single-digit growth in the preceding 12 months.

Earlier this month, RBI doubled the limit on gold loans under the bullet repayment modes from Rs 2 lakh to Rs 4 lakh. This is applicable to urban cooperative banks. Bullet repayment schemes are modes of payment where the debtors pay off the entire principal and interest in one go after the term.

Indians own in excess of 27,000 tonnes (which is 14% of the world’s total gold) of gold and out of it around 5,300 tonnes – or roughly 20% is pledged.

According to the report, the outstanding loans taken by pledging gold jewellery stood at Rs 73,215 crore on July 30, 2021. It rose to Rs 77,785 crore a year later and to Rs 95,746 on July 30 this year.

One of the conveniences that have boosted gold loans is they are quickly available and interest rates are quite low since these loans are fully collateralised.

For example, Federal Bank offers an interest rate of 8.99% for gold loans. Against that figure, personal loans in the same bank charges a minimum of 10.49% which goes up according to the creditworthiness of the applicant.
However, lenders are becoming more and more cautious as the price of gold surges. “While higher gold prices have a positive impact on loan growth, we tend to be cautious in these times since any decline in gold prices can have a cascading impact on collateral values/mark-to-mark and other factors that could potentially be difficult for borrowers,” Rohan Juneja, managing director and CEO, Tru Cap Finance, told the newspaper.