Rising demand for gold loans

Gold is precious for Indians, more so for Indian women. Apart from the ornamental value that the shiny yellow metal embodies, it offers instant liquidity when one is in a dire need of financial resources.

It's a fact that Covid-19 pandemic has taken a huge financial toll on people as millions have lost their jobs. Many more lost their livelihood. Such people look for a way-out from the financial strains and availing gold loans from organised or unorganised lenders is an easy option for them. This is amply evident in a recent report released by the World Gold Council (WGC).

According to the report titled 'Gold loans help India weather the Covid-19 storm', the outstanding gold loan is likely to go up to Rs 4.05 lakh crore in the current financial year, from Rs 3.45 lakh crore in FY20. The gold loan book is expected to reach Rs 4.61 lakh crore in FY22. Increase in demand for gold loans also pushed up AUMs of the Non-Banking Finance Companies (NBFCs) that focus on gold loans.

A leading gold loan NBFC witnessed 33 per cent surge in its AUM (assets under management) while another NBFC saw 15 per cent jump. A Kerala-based bank also registered 36 per cent upswing in its AUM year-on-year.

However, there are multiple factors for the increased demand for gold loans. Apart from the pandemic-induced personal financial hardships cited above, rise in gold prices also led to an increase in gold loan portfolios. Domestic gold prices went by 28.8 per cent till date this year. That means borrowers are able to avail more loan amount for the same quantity of gold. The WBC report also revealed that more people opted for gold loans instead of outright selling of the yellow metal.

Besides, banks and NBFCs are also aggressively promoting gold loans as risk is minimal and non-performing assets (NPAs), a bane for the banking sector, are very low in this segment. As Somasundaram PR, Managing Director-India, World Gold Council, pointed out, small businesses use gold loans as pillar of support when tide turns against them and business slows down. They borrow short-term loans using gold as collateral and run the show.

As is evident from the available data, small businesses took a major hit during the ongoing pandemic. Obviously, this segment also generated more demand for gold loans as small businesses lack collateral required to avail other bank loans.

Nevertheless, rising demand for gold loans signals an increase in financial distress in the society due to the economic crisis triggered by the Covid-19 pandemic. This trend may continue if the second Covid wave hits the country, further crippling the economy.

The situation may not improve unless the country's economy comes back on a growth track. That can only happen if the governments initiate concerted efforts to boost growth. Until that happens, more and more Indians will knock at the doors of banks and NBFCs to avail gold loans. That's a bad omen, isn't it?