Gold loans shine a little brighter this fiscal quarter. The latest data from the Reserve Bank of India (RBI) shows that gold lending has increased 82% since March of last year.
Experts believe the surge in gold pledges can be attributed to the intense economic distress caused by the COVID-19 pandemic. As lakhs lost their savings in COVID treatment, many small and medium-sized businesses are seeking capital to overcome the huge losses suffered since 2020.
Gold has been considered an age-old form of investment in the country, especially in southern India. It is one of the largest gold markets in the world. Indians prefer gold not only for its monetary value, but also because of a certain emotional attachment. Gold ornaments are passed down from generation to generation and are used as collateral to raise capital quickly.
According to the World Gold Council, the average Indian household owns 84% of its wealth in real estate and other physical assets, 11% in gold and the remaining 5% in financial assets. The dependence of rural households on physical assets such as gold has been the result not only of the love of gold, but also of low banking penetration until recently.
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Organized and unorganized sectors
Indians generally prefer to pledge gold rather than sell it because the yellow metal has emotional significance to them. Traditionally, they have mortgaged their gold to local lenders and pawn shops for short-term expenses. In recent years, banks and non-bank financial corporations (NBFCs), which form the organized sector of the gold lending landscape, have provided loans for gold. However, the majority of the market is still dominated by the unorganized sector.
A report titled “Return of Gold Financiers in India’s Organized Lending Market,” published by the accounting firm KPMG, stated that the organized gold lending market comprising banks (public, private, petty finance and cooperatives), NBFCs and of Nidhi companies contributes only 35 percent of the Indian gold lending market.
The Managing Director and CEO of Manappuram Finance Ltd., Vice President Nandakumar, said in a report: “This business was the preserve of the unorganized sector, pawn shops and pawn shops who operated in the tracks and the pawn shops. lanes across the country, away from the oversight of regulators and politicians. manufacturers. Indeed, India’s regulatory and policy-making establishment (as well as banking sector policymakers) were largely uninformed about gold lending and the importance of so many Indians. ordinary. The unorganized sector is still preferred for gold lending as the actors are known to deliver money quickly with little documentation, making it easier for the unbanked population without a credit score to get a loan.
The dangers of pledging gold in the unorganized sector
High interest rates: The main disadvantage of pledging your gold with the local lender is the high interest rate. Since players are unregulated, lenders are very likely to be financially exploited by lenders.
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While NBFCs charge an interest rate of 11-24% and banks charge between 7-15% per annum, local lenders charge between 25-50% for the same period.
An official working with a large public sector bank said: “Besides the low interest rates, the process of getting gold loans from banks has also become easier, as customers can now apply for a loan online. . The process does not take more than an hour. With the Pradhan Mantri Jan Dhan Yojana, a large part of the previously unbanked population now has bank accounts, making it easier for us to enter the market. “
The major NBFCs provide home gold loans where an agent goes to clients’ homes to appraise gold assets. Unlike banks, they take more risk and lend to customers with low credit ratings.
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Low assurance of recovering valuables: Formal institutions follow a transparent process for returning your gold after the term has ended. You can rest assured that after the loan repayment period, your valuables will be returned to you.
An official who deals with gold lending at a national bank said: “In the event of default by a gold lender, it is the prerogative of the bank to get rid of the gold and get his money back. Therefore, a standard procedure is followed before gold is declared non-performing asset (NPA) and auctioned. After a few reminders to the borrower, a notification is published in the newspapers regarding the auction in order to give the customer every chance to get his gold back. These processes do not exist in the informal sector, making local lenders less responsible for collateral.
Dubious valuation: You are more likely to get the true valuation of your assets in banks and NBFCs than in the unorganized sector. The loan amount that can be raised against gold depends on the value of the gold, and pawn shops can easily take customers for a ride quoting a lower price of the pledged valuables.
No fixed LTV: The loan-to-value ratio (LTV) is the amount of loan-to-gold that you can avail on the value of the gold you own. “This value was set by the RBI at 75 percent. But lenders in the unorganized sector are not required to follow this and often offer a lower LTV, ”said a branch manager of an NBFC.
Sensing the distress in the economy, the RBI had raised the LTV to 90 percent for banks last year, so people could raise more money against the yellow metal.
security: Once you have pledged your gold coins, bars or ornaments to a regularized institution, you can be assured that the assets will be stored safely. Banks and NBFCs invest in high-end security systems to protect mortgaged valuables. In the event of theft, they are required to compensate their customers for the losses. But this assurance can hardly be given in the informal market.