Gold loan businesses are set to grow higher as households increase pledging amid the pandemic stress

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Covid-19’s second wave seems to have deepened the distress and more people are turning to their investments in gold for financial needs. The heightened uncertainty around the pandemic and increased risk aversion among lenders is making gold loans a preferred avenue.

Outstanding loans against gold jewellery given by banks rose 82% to Rs 60,464 crore as of March 2021, from Rs 33,303 crore as of March 2020, according to data with the Reserve Bank of India.

Banks have also reported a surge in gold loans in the year ended 31 March, driven by rising gold prices and risk-averse lenders demanding collateral for loans. Gold loans more than doubled to Rs 60,464 crore in FY21 from Rs 26,192 crore a year earlier.

Pandemic-led gold loan demand 

As per an HTF Market Intelligence report, “As of 2019, households in India assembled about 25,000 tons of gold, making the country the largest holder of the yellow metal in the world. Rural communities account for 65% of the total gold demand in the country. Owing to the sentimental value that Indians associate with this indispensable item, people seldom sell it to meet financial emergencies. They prefer to pledge gold as collateral to secure short-term loans.”

The report mentions that the Indian gold loan market has witnessed a positive impact on business during the nationwide lockdown due to the Coronavirus pandemic. Gold loan products have experienced rapid growth than other retail banking products during this period. Due to economic distress and job losses, gold is acting as an insurance policy, as well as a retirement plan across India. People are availing gold loans to fulfil their immediate fund requirements.

For Muthoot Finance, a leading non-banking finance company (NBFC) reported its March quarter earnings recently, gold loans under management reported a quarter-on-quarter growth of 5% during Q4, while other loans declined by almost 9%.

As per a PTI report, gold loan-focused non-banks like Manappuram Finance has auctioned a record 1000 kg, worth Rs 404 crore, of the pawned gold in Q4 indicating deepening distress among the public due to the pandemic. Lenders auction pieces of jewellery against which money has been advanced but borrowers have defaulted.

“This year people have even less money this year compared to FY21 due to the second wave of infection. When cash goes down, the asset that people tend to fall back on in our society is gold. So, this year the tendency to raise loans pledging gold will double this year,” said S K Chandra, Rashiklal Chandra Jewellers, which has been in business for more than 100 years in Kolkata.

Estimates for gold loan growth

Muthoot Finance had earlier this year indicated in media reports that the demand for gold loan was consistently rising and the company is adding new customers to its gold loan business on a daily basis with small businesses and traders preferring it for a quick loan. In fact, the company has guided that its gold loan business is likely to grow by more than 15% in the next three years.

Indel Money, a South Indian gold loan player, has mentioned in media that it expects its business to grow by 50% this fiscal year as they see the unlock to have more households coming in to pledge gold

Manappuram Finance on the other hand mentioned that its gold loan business is expected to gather pace in the second quarter of the fiscal with the gradual unlocking of the economy.

VP Nandakumar, MD & CEO of Manappuram Finance, spoke to media on Q4 earnings recently and said, “There could be a slight decline in the gold loan portfolio of the NBFC in the first quarter before demand gathers momentum.”