Pledging Gold For Loans

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Pledging Gold For Loans
Rajat Mishra - 03 September 2020

Gold is often seen as an auspicious asset in India with good gains and acts as a safe haven during crisis. With pandemic looming large, the yellow metal has seen a sudden spike in demand.

Tapan Patel, Senior Analyst, Commodities, HDFC Securities explaining the reason behind the picking up demand for gold-backed loans, says: “There are two reasons which are driving the rise in demand of gold-backed loans in India- one, gold prices are going high and secondly, there is a liquidity crunch in the market due to COVID-19 induced pandemic.”  

These are secured loans where gold articles are taken as collateral by the lending bank or NBFC. The loan is given to borrowers against gold as a collateral. The tenure of the gold varies with every lender and so do interest rates.

India’s largest lender SBI is offering gold loans at an interest of 7 to 7.50 per cent with the processing fee of 0.50 per cent. PNB is offering gold loans at an interest rate of 8.60 to 9.15 per cent with a processing fee of 0.75 per cent. Muthoot Finance offers loans at an interest rate of 12-27 per cent.

On August 6, Reserve Bank of India (RBI) increased the permissible Loan-To-Value (LTV) on gold for non-agricultural purpose to 90 per cent from 75 per cent. This relaxation will be available till March 2021. This means borrowers can now get more money on the same gold collateral and banks can lend more against gold ornaments. Non-banking lenders specialising in gold-backed loans have approached the RBI seeking to enhance the permissible LTV to 90 per cent in their case too.

Muthoot Fincorp, a leading non-banking financier has disbursed loans worth Rs 8,321.72 crore during Jan to March, with over 19 lakh customers as compared to previous year. Between May and July, gold loan worth Rs 10,250 crore has been disbursed to over 20 lakh customers. Mumbai-based India Infoline (IIFL) disbursed loans worth Rs 1,674 crore.

“Loan against gold has undisputedly proven to be the best option for customers during unprecedented times like this. Demand has increased substantially across the board. Our portfolio has grown by 48 per cent year-on-year, with a 100 per cent increase in new loans to back customer acquisition. Disbursement has grown by 44 per cent,” says CVR Rajendran, MD & CEO of CSB Bank.

According to a KPMG report, India’s gold loan market is expected to reach Rs 4.617 lakh crore by 2022 at a five year compounded annual growth rate at 13.4 per cent. The organised gold loan market comprising banks, NBFCs and Nidhi Companies contribute to nearly 35 per cent of the Indian gold loan market. About 65 per cent of India’s $46 billion gold loan industry is dominated by informal lenders, whose interest rates can range anywhere between 25 to 50 per cent. With the size of the unorganised gold loan sector, which is estimated to be three times the size of the organised sector, there is a significant potential for growth.

Saurabh Kumar, Head of Gold Loan, IIFL Finance says, “We are going to witness a big demand for gold-backed loans in the year ahead. And a 50 per cent jump in overall gold price means the market will expand to cater to the needs of the people. Gold loan is a quick and easy product to get. One can walk into a branch, take a loan and walk out with cash in just 30 minutes. Its hassle-free nature is one of the reasons behind the boost in demand.”

According to credit rating agency Crisil, the overall loan growth in India’s banking system has already been decelerating and is expected to hit a multi-decade low of 0 to 1 per cent this fiscal.

In fact, now banks and NBFCs are scrambling to grab a pie of the rise in demand for gold loans. ICICI Home Finance has started offering gold loans through its 70 branches; Canara Bank recently restructured its business to launch a gold loan vertical. Amid contactless culture, companies are trying to make the process convenient and fast like never before. Manappuram Finance too has announced doorstep delivery of gold loans in Delhi and Mumbai. The process promises to be hassle free and requires two employees of the company to visit the customer’s residence to appraise the gold loan and then make immediate disbursement through NEFT or IMPS to the customer’s bank account. Muthoot Finance is also offering “Loan@home” service where the NBFC is helping customers to avail loan without stepping out of their homes.

IIFL Finance, the non-banking finance company, has launched Digital Gold Loan, which allows customers to avail loans online, without visiting the branch.

“To make the process of availing loans easy, we have our 24*7 product where our existing customers need to send an SMS and once they do so their accounts are credited with the money. For new customers, we are adhering to all safety norms put forward by the health department,” explains Thomas George Muthoot, Director, Muthoot Fincorp.

 As per World Gold Council’s (WGC) estimates, Indian households are sitting on a $1.5 trillion hoard of gold, the biggest of its kind, largely in the form of jewellery.

With the pandemic and a surge in price of the yellow metal, growth of gold loans too has seen a hike. Experts are of the view that there is more scope of an upswing.

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