“There is completely no fear of Covid in this year’s festive season. So, people want to splurge,” said Thomas John Muthoot, chairman and managing director, Muthoot Fincorp. Gold prices shot up by 4% last week due to escalating geopolitical tensions and improved safehaven demand. Currently, 24-carat gold is about Rs 59,100 per 10 gm, 18% higher than Rs 50,060 a year ago.
“We are anticipating pent-up demand for gold loans at least 20% more than last year’s festive season. Whenever the gold price increases, there has always been a positive impact on the gold loan business,” said Umesh Mohanan, executive director and chief executive of Indel Money. The erratic monsoon in some parts of the country may have also dented rural incomes, forcing people to borrow against their gold.
Data from the Reserve Bank of India (RBI) show outstanding gold loans at Rs 95,476 crore as on July 28, up 23.1% from a year earlier, a sharp acceleration from the single-digit growth in the preceding 12 months. Earlier this month, RBI doubled the limit on gold loans under the bullet repayment scheme — from Rs 2 lakh to Rs 4 lakh — for urban cooperative banks, subject to conditions. Central bank data show India owns more than 27,000 tonnes or 14% of the world’s gold, of which around 5,300 tonnes is pledged.
Being collateralised loans fully backed by a liquid asset, gold loans are easily available and interest rates are lower too. The maximum loan-to-value ratio for gold loans is 75%, according to an RBI directive, allowing borrowers to raise quick funds without selling gold.
Federal Bank, a prominent player, offers gold loans at as low as 8.99% interest, against a minimum 10.49% charged for personal loans, according to its website. Documentation is easier, too, with lenders asking only for identity and address proof.
Rohan Juneja, managing director and CEO, Tru Cap Finance, said, “While higher gold prices have a positive impact on loan growth, we tend to be cautious in these times since any decline in gold prices can have a cascading impact on collateral values/mark-to-mark and other factors that could potentially be difficult for borrowers.”