Gold loans glitter as consumers pledge jewelry for cash

Source: Reuters

2020 has thrown many surprises. One such seems to be the spurt in demand for gold loans, which has been much higher than in previous years. Industry insiders Moneycontrol spoke to pointed out that there has been a jump in consumers taking loans while pledging gold, primarily for business purposes, and to tide over the financial distress brought on by the Covid pandemic.

Bankers and fintech executives who track this space attribute this to both demand from borrowers and supply from lenders. While many small business owners are looking for credit to jump-start their business after months of coronavirus-induced lockdowns, banks on the other hand are more comfortable processing gold loans because of the collateral on offer.

While a large chunk of such loans is taken for business, consumers are also using their family wealth to get some cash in hand and also for emergency needs like medical, education and others.

Players like Fino Payments Bank, FIA, Rupeek have told Moneycontrol that they are processing almost double their usual volumes for such loans.

India, which is one of the world's largest consumers of the yellow metal, has been using gold as an asset for credit since forever. But what Covid-19 might have done, fintech executives said, is forced many families to use their gold jewelry to tide over a cash crunch or help with restarting their business.

Strong uptick for gold loans

“We are doing around Rs 400 crore disbursals per month and growing this number 15% month on month,” said Sumit Maniyar, founder of Rupeek, a Bengaluru- based start-up which processes gold loans for consumers working with few of the top banks in the country.

Fino Payments Bank is also pushing the gold loan product through its banking channels. The bank, which cannot lend on its own, works with ICICI Bank and is in talks with another large NBFC to source gold loans from its customer base. Fino, which sourced around Rs 1,000 crore worth gold loans from its customers in the last financial year, is set to double the number in this year.

“We had set a target of Rs 1,600 to Rs 1,800 crore, which we will exceed and record around Rs 2,000 crore worth gold loans sourced through our agent network,” said Amit Jain, head of alliances at Fino Payments Bank.

FIA, another business correspondent which sources gold loans for its banking partners, has also reported a massive jump in demand for credit. Seema Prem, chief executive officer, FIA, said that usually they do around Rs 200 to Rs 300 crore worth of gold loans every year, which has almost doubled now, with the bulk of it being in the months of November and December.

The demand-supply game

Jain from Fino explained that the demand for gold loans has shot up due to multiple reasons. One is the price of gold, which has appreciated a lot over the last few months. The value of gold jewellery has gone up, too, thereby many consumers in need of cash are ready to use it as collateral. Over the last one year, the price of gold has shot up to more than Rs 50,000 per 10 grams, from less than Rs 40,000.

Second, banks are also keen on gold loan as a category, since it gives them a cushion against defaults at the same time while actively giving out credit.

“Some banks are very keen on pushing gold loan as a product, even multiple unsecured applications are being directed towards this product,” said Jain of Fino Payments Bank.

Further, the central bank has also played an important role in pushing demand for such loans. On August 6 this year, the Reserve Bank of India opened a window to allow banks to give out up to 90% of the value of gold ornaments as loan to the consumer. The window has been opened till March 31, 2021.

The central bank said that this will help consumers tide over the liquidity issues they might face because of disruptions caused by Covid-19.

Geographic Spread

Historically, gold loans have been popular in the southern parts of the country, and states like Tamil Nadu, Kerala, Andhra Pradesh have been frontrunners in gold loan processing. Bankers in the know pointed out that the family taboo of mortgaging gold is going down in the northern states as well, with time.

This has also helped banks expand their gold loan portfolio.

Jain believes that with families becoming more nuclear, they are less averse to keeping their gold as collateral and raising funds. The largest south-India based gold loan players like Muthoot Finance and Manappuram Finance have expanded their presence across the country, thereby playing an important role in popularising this product among the masses.

Further digitisation of the product has also helped it become more mainstream. Players like Rupeek and large private sector banks have helped make gold loans mainstream. As one industry insider commented,  from the days of unofficial pawn shops which charged exorbitant interest rates, gold loans are now becoming much more institutionalised.