Over the last 15 months, the pandemic has dented household earnings, especially in the middle and lower income categories. A rising cash crunch and unforeseen medical expenses seem to have prompted people to go for gold loans. Over the 12-month period ended May 2021, the gold loan segment for scheduled commercial banks recorded the highest credit growth among all sectors at 33.8%. While many people are looking to monetise their gold holdings to meet their immediate needs, the question is: When should you consider taking a gold loan?
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Over the last 12 months, gold loan outstanding with banks has risen from Rs 46,415 crore in May 2020 to Rs 62,101 crore. Since March 2020 when Covid struck, it has risen by 86.4%, or Rs 33,308 crore, RBI data shows. Industry insiders note this is only the business done by scheduled commercial banks.
“If you include the loans extended by gold loan companies like Muthoot Finance and Manappuram Finance, the outstanding will be much higher. The gold loan segment has emerged as a major growth area for banks as it’s easier to get,” said an official of a nationalised bank. Public sector banks, which were not very keen on gold loans earlier, have found this a major growth area. State Bank of India has witnessed a 465% jump to Rs 20,987 crore in FY20-21.
Why the jump?
Industry insiders say it could be an indication of stress in rural areas, the low-income group and micro units. Lockdowns imposed by the Centre last year and state governments this year have kept small business units under extreme pressure. Also, decline in demand has impacted the cash flow for many units across industries, and their ability to pay their employees.
Pledging gold as collateral to meet financial needs has been an constant feature of the Indian gold market. Traditionally, households use gold loans to meet costs of health, education and marriage, while small businesses use them for their working capital needs.
The World Gold Council said demand for gold loans, both through banks and non-banking financial companies, has grown in response to the economic impact of the pandemic. “As a result, outstanding organised gold loan is expected to grow to Rs 405,100 crore ($55.2 bn) in FY 2021 from Rs 344,800 crore ($47 bn) in FY 2020,” it said.
Manappuram Finance’s aggregate gold loan disbursements went up to Rs 263,833.15 crore from Rs 168,909.23 crore the previous year. As of March 31, 2021, it had 25.9 lakh live gold loan customers. Despite the 10-12% decline in gold prices, Muthoot Finance’s loan book grew by 4% quarter-on-quarter. Even in the second Covid wave, loan demand is likely to remain high.
The entry of public sector banks in a big manner in the gold loan business comes as a boost for customers. As against a rate of close to 10% charged by NBFCs, State Bank of India is offering loans at 7.5%.
But low rates should not be the reason for individuals or small business owners to go for a gold loan. Experts say taking a loan in these times could be both a good and a bad idea depending upon who you are and what you are borrowing for.
Taking a loan for consumption needs or to fund a marriage may not be a good idea if income is under stress. if you are unable to repay the gold loan, you run the risk of the financier selling the gold you pledged. In the quarter ended March 2021, Manappuram Finance auctioned gold worth Rs 404 crore, compared to a total of Rs 8 crore during the first three quarters.
However, if the loan is for funding short-term working capital needs and to cover up for a stretched payment cycle, it is advisable to take it.
“For a small businessman whose need is driven by a rise in the payment cycle and who is looking to cover a gap for a few months, it is not a bad idea. While gold loans are quick, it would make sense only if the disruption in cash flow is temporary and the individual is taking the loan just to fund that,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.
Banking experts say that if business viability is not very clear, even small businessmen should not take a gold loan. “In the Covid-hit economy, many small and medium-sized businesses have lost business viability and are struggling to cope with routine payments. It does not make sense to borrow further, just to keep paying the bills, without a chance of business survival. If the intent is honest, they may want to look at taking recourse under IBC and to restart business life all over again,” said Srinath Sridharan, Corporate Advisor & independent markets commentator.
If your income flow has been impacted and debt has become an issue, you can consider liquidating part of your gold assets. While gold is traditionally considered an asset for unprecedented times, one must not get emotional about selling a part of it to repay a loan, especially since prices have risen significantly over the last 15 years.
“Don’t let emotions come in between. One needs to be rational about it. Since one has gone through an unprecedented crisis, don’t borrow but sell. You can always buy it back later when the situation improves,” Dhawan said.
In fact, a part of the money should be utilised to take health cover and life cover.