A gold loan is a viable option for people to fulfill an immediate need. An increase in the value of gold helps customers raise a better loan amount against the ornaments. India's demand for gold-backed loans has risen as its price crosses Rs. 50,000 per 10 gm (24 karats) allowing families to borrow larger amounts against holdings. Gold prices are on the rise and so is the demand for gold loans. The gold price is touching a record high in the domestic market, and in the current scenario, gold glitters as a ray of hope for individuals as well as many small businesses.
Hence, taking advantage of this opportunity, banks and lenders have started reaching out to existing and prospective customers with the gold loan proposition.Indian families, sitting on the world's biggest private stash of gold, are rushing to borrow against their jewelry as the precious metal rallied to records and the coronavirus pandemic fuels an economic downturn. Now, financial firms and banks are using that demand to lure more customers from pawnbrokers and money lenders. According to the banks there has been a lot of demand coming from the traders, shopkeepers, and small businessmen that are opting for gold loans to restart their operations after the lockdown. Gold loan are short tenure loans essentially used as working capital for small businesses.
The added competition could lower borrowing costs for Indian consumers, who in desperate moments of financial stress often pay exorbitant rates to informal lenders to use gold as collateral. Firms like HDFC Bank Ltd and Federal Bank Ltd. Are expanding the loans they make against the precious metal. HDFC Bank is boosting the number of branches offering such loans in rural India, where money lenders remain the norm.
The world gold council estimates that Indian households are sitting on a $1.5 trillion hoard of gold, the biggest of its kind, largely made up of jewelry, which families often inherit or are gifted at weddings. Gold is worn on special occasions and can contribute to a substantial portion of the marriage dowries of women. It also doubles up as an insurance policy and retirement plan in a nation lacking robust social welfare systems. With the nationwide lockdown impacting the businesses, many of them do not have sufficient collateral to provide against bank loans, they prefer to opt for gold loans. Gold loans are the quickest and easy form of working capital that one can avail and kickstart a business.
Gold loans allow customers to draw up to 75% of the value of the metal. Banks can charge gold loan interest rates of about 7-15% while Non-Banking Financial Companies (NBFCs) can charge rates from 12-29%. The current interest rate of gold loan offered by SBI is 7.50%, HDFC Bank 10.05%, IIFL 9.24%, ICICI Bank 10%, etc. Whereas, Muthoot finance offers 12% and Manappuram 12%. HDFC gold loan is slowly making inroads into the market and plans to raise the number of branches offering gold loans in rural areas this year from 800 in the previous financial year. The push by the banking sector could help the market for gold loans grow by 29% to 25% this fiscal year amid demands from small businesses and agricultural operations that are often family-owned.
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