Gold loans, backed by the gold assets, are emerging as one of the popular options for getting finance as the entire world has come to a standstill. Also, as the other choices for borrowing have become difficult in times of lockdown, people are considering gold loan options.
As per the average estimate which is made, many people could not seek support from the bank. There is a push back in terms of loan growth, and the liquidity is also improving.
There are many degrees of industry executives who have pointed out the rise in demand for gold loans. Gold loan is considered to be a safe option as compared to other forms of investments. There is an upward trend in a gold loan market with the rise in the price of a gold loan. Moreover, as the NBFC credit in other forms has fallen, the gold loan in its way has taken a rise. The overall gold market and gold rate in Delhi gives a detailed overview about the same.
Here are some of the reasons why there has been rapid growth in gold Loan as compared to other loans
- Potential of gold: It is estimated that nearly 22,000-25,000 tonnes of gold is lying idle with Indian households. Further, as per the reports of the World Gold Council, Rural India accounts for 65% of this gold stock. Thus, gold loans are emerging as an ideal option for getting finance.
- Loan amounts: With the increasing price of a gold asset, the borrowers can get more credit for the same weight of gold. Further, several lenders like Tamil Nadu State Apex Co-Operative Bank Limited are also evaluating the gold at higher values than the regular evaluation of gold. Thus, gold loans have turned into a boom for the borrowers.
- Liquidity challenges: Multiple loan options like a home loan or a personal loan are not feasible in the times of lockdown. It is because both banks and small finance companies are facing liquidity options for providing the loans, which may further deteriorate in the coming future.
- Losing unemployment: In the times of lockdown, companies are facing huge losses. Thus, they are either managing the crisis by laying off the jobs or cutting the pays of the employees. In such a scenario, there is the instability of employment and income. A gold loan is thus a viable option for both the lenders and borrowers. Lenders don’t need any assurance for income stability, nor does the borrower need to submit proof for income. Thus, they can easily avail gold loans.
- Lower interest rates: Along with providing hassle-free gold loans, the lenders are also trying to give the gold loans at a lower interest rate to ease the liquidity issues for the borrowers who are struggling to revive the business. Canara Bank, for instance, announced a gold loan campaign to provide gold loans as low as 7.85% pa till June.
- Online gold markets: The objective of the online gold market is to make gold loan accessible and comfortable for the borrowers. Non-banking institutions are exploring the digital spaces to provide the gold loans entirely on a digital platform. Borrowers thus do not need to visit the institutions. From applying loans to sanctioning of credit, the entire process of gold loan is digital.
As per the RBI guidelines, the lenders are allowed to give loans up to 75 per cent. Earlier the LTV ratio was 60 per cent. But, now the growth rate is revised to 75 per cent.
With a wide variety of loan options, people often take a loan and put themselves into debt. But, unlike the case of gold loan, which is a successful form of investment and collateral-based, is more feasible. Also, there are various customers whose credit score has come out to be almost 650. So, with a gold loan and timely payment, people can come out of the debt and improve their credit score.
What do different stakeholders have to say about the demand for gold loans in India:
VP Nandakumar who is the managing director of Manappuram Finance, which is a non-banking finance company says that “During periods of economic downturn, banks and NBFCs (non-banking finance companies) alike become risk-averse, and lending slows down. It is, therefore, likely that the demand for gold loans may rise in the aftermath of the lockdown”.
“With many NBFCs facing liquidity challenges, lending will be further constrained and gold loans may then become the fallback option for borrowers denied access to the regular channels,” Nandakumar said.
With a wide variety of loan options, people often take a loan and put themselves into debt. But, unlike the case of gold loan, which is a successful form of investment and collateral-based, is more feasible. Also, there are various customers whose credit score has come out to be almost 650. So, with a gold loan and timely payment, people can come out of the debt and improve their score.
Gold Loan is considered to be beneficial in terms of both the lender and the borrower :
Here are the following points :
|Best utilization of gold and fetching returns from gold.||Collateral based gold loan|
|Minimum documentation and no need of a credit history||Gold Loan as a product class has one of the lowest non-performing asset rate|
|Highest liquidity in terms of emergency||Most liquid asset in terms of liquidity|
|Easily affordable, flexible and low rate of interest.||Helps to reduce the exposure to the gold volatility.|
Steps that were taken by Reserve Bank of India for gold loans:
RBI said that the banks and other institutions don’t need to set aside the capital for gold loans and has further kept the risk weighting on the gold loans at zero percent.
Conclusion: It is expected that the gold markets have a vast potential to grow after the lockdown. With the easy availability of finance without any income proof or CIBIL, gold loans are one of the secure and easy financing options for lenders as well as the borrowers.