Gold Loans filling the lending gap in the times of COVID 19
Gold loan or loan against the mortgage of gold is gradually replacing other secured gold loan such as personal loans in the times of COVID 19 when individuals are dealing with the issue of cash crunch both to manage their day to day operations and to run their business activities. Banks, who are otherwise meant to provide aid to the borrowers in unprecedented times like this, are themselves dealing with liquidity challenges. This indeed has created a unique problem for the individuals to raise money. One option that has, however, provided a solution to financial distress is gold loans.
Economics of the gold loan market in India
To understand the increasing demand for gold loans, you need to understand the economics of the gold loan market.
- Players in the gold loan market: As per the estimates of KPMG, the organised players in the gold loan market which consists of commercial banks, non-banking financial institutions and small finance companies comprises a share of 35% that comes around Rs. 467000 Crore. Thus, the major share of the market is still occupied by unorganised players, which of course needs to be brought down under the ambit of RBI with tighter rules and guidelines.
- Utilisation of gold: Another factor that you need to understand that in India, gold holds an auspicious significance in occasions such as marriage and festivals. However, going by the facts, we come to know that only 5% of these stocks of gold is pledged as a guarantee for a mortgage or a gold loan. It clearly gives an indication that there is a huge opportunity to tap this market, especially for rural households.
Understanding the nature of gold loans: Along with understanding the gold loan market, it is equally crucial to know about the nature of gold loan before you decide about availing a gold loan.
One of the reasons why a gold loan is becoming the popular choice for the borrowers is that in the times of COVID when people are struggling with the funds’ availability a gold loan can be easily availed.
Let’s understand how!
The biggest problem that people are facing these days is that they have either no work or have suffered cuts in their salary. Thus, the source of income is certainly not stable. In such a scenario, a borrower can easily avail a gold loan because the financial institutions do not ask for any kind of proof for income. A gold loan can be availed with minimum documentation for identity and address proof which are easy to produce.
Along with that, if you have a low CIBIL score, which has a higher chance given the present scenario, still you can avail loan at lower interest rates as financial institutions do not even ask for your credit score as well.
With all these factors, most of the financial institutions that have understood the gold market are tapping the opportunity by creating unique gold loan schemes for the present times. For instance, Canara Bank launched an all-time loan scheme under which borrowers were provided with a gold loan rate of 7.75%.
Muthoot Finance is another such institution that has been quite popular as compared to traditional NBFCs. It is providing gold loans at the doorsteps to the borrowers, which seems apt at this time. Also, as the trend indicates the digital footprint of gold loan providers will further increase the demand for gold loans post COVID as well. Of course, the recent guidelines under which banks could provide gold loans up to a maximum of 90% of the value of gold to the borrowers is another reason why people are gradually shifting towards a gold loan.