Indians are sitting on the world’s biggest private heap of golds are rushing to borrow against their jewellery as the precious metal rallied to records and the coronavirus pandemic made an economic downturn. Now, the financial firms and banks are using that demand to persuade more customers from pawnbrokers and money lenders.
The already set competition could lower borrowing costs for Indian customers, who in desperate moments of financial stress often pay exorbitant rates to informal lenders to use gold as collateral. Firms like HDFC Ltd. and Federal Bank Ltd. are expanding the loans they make against the precious metal. India’s gold lenders such as Muthoot Finance and Manappuram Finance are making it easier for their clients to borrow.
Manappuram is offering gold-backed loans at the customer’s doorstep via a 24-hour banking system as people are afraid to go out while the Coronavirus cases are rising in India and it also has staff and vehicles on standby to give service on client’s request. HDFC Bank is boosting the number of branches offering several such loans in rural India, where money lenders remain the norm.
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The World Gold Council estimates that Indian households are sitting on $1.5 trillion hoards of gold, of which largely are made up of jewellery which families often inherit or are gifted at weddings. Gold is worn on special occasions and can contribute to a substantial portion of the marriage dowries of women. It also doubles up as an insurance policy or retirement plan in a nation lacking the social welfare systems. As a result, India’s demand for gold-backed loans has risen rapidly as its global price has approached $2,000 an ounce, allowing families to borrow larger amounts against their holdings as reported in the Quint.
Banks have a long but limited presence in the gold loan industry but are attempting to make bigger inroads this year as other sources of income have dried up. But now they want to reach up to more customers like Paul Fernandes, who mortgaged some of his wife’s gold ornaments at a local bank in the coastal state of Goa to pay for his children’s education fees in June. Fernandes worked as a head- waiter on the cruise ship, he hasn’t drawn salary in three months since his contract with a UK based company expired in March and he had to return home. The quick loan was a lifeline for him, as reported in the Quint.
Gold loans allow consumers to draw up to 75 percent of the value of the metal; banks can charge interest rates of about 7 percent to 15 percent while Manappuram and Muthoot can charge rates from 12 percent to 29 percent.
The Coronavirus pandemic lockdown in India has closed business and left millions jobless pushing India’s economy towards its first annual contraction in four decades. Bank loans may not grow at all in the year ending March 31, 2021, according to the local unit of S&P Global Ratings. This makes gold-backed loans particularly important.
The managing director of the World Gold Council said, “Gold loans are growing but once the lockdown is lifted and some sort of normalcy returns you will see a big jump. As when most businesses open they will require capital.”