Indians are returning to one of their oldest assets amid a pandemic which was preceded by a banking crisis, reports the BBC’s Nidhi Rai.
To say that Indians love gold would be an understatement. Over the centuries, households – as well as temples – have amassed the precious metal.
According to an estimate by the World Gold Council last year, the total gold reserves of Indian houses were around 25,000 tonnes – the largest of any country.
This time-tested investment has regained its popularity as India’s economy recovers from the devastating effects of a global pandemic. When Covid-19 hit India’s $ 2.5 billion (£ 1.9 billion) economy was already sizzling due to a banking crisis.
One of the results was a tightening of liquidity, which prompted many Indians to look to gold both as an investment and as collateral.
And they are increasingly using it to raise funds, says commodity market expert Kunal Shah.
At a time when traditional bank loans are more difficult to obtain, a rise in the price of gold has helped fuel the popularity of these loans.
Gold prices have jumped 28% this year to over 50,000 rupees ($ 668; £ 515) per 10 grams.
The jump in value is due to several reasons. On the one hand, Western banks print currencies and buy gold on the international market as long-term collateral. Second, stock markets around the world are volatile, causing people to invest in gold, driving up its price. And with interest rates in several countries in negative territory, it is not profitable to keep money in banks.
All of this has affected the price of gold, with experts saying its value is expected to rise further in the coming months.
Disha Dinesh Parab, from the western city of Pune, is among those who have relied on gold loans to keep their businesses afloat during the pandemic. For the past 10 years, she has been making and selling around 40 to 50 boxes of food a day. But in recent months – due to weak demand in a partially open economy – it has had to cut prices by $ 1 to 80 cents per lunchbox and has only been able to sell a quarter of what it used to do. .
She says a gold loan was “the fastest and cheapest option available.”
Ms. Parab pledged six gold jewels for a gold loan from a local cooperative bank for $ 3,340. It pays interest of 9.15% per annum for three years. If she had opted for a personal loan, she would have had to pay a higher interest rate – just over 11% – for the same period.
Farmers also see gold loans as a boost. Housilal Malviya, a farmer from the western state of Maharashtra, borrowed more than $ 5,000 for gold to start sowing on his farms.
“We tried to take a loan from the banks, but they asked too many questions and were reluctant, but the local cooperative bank was ready to help. [with a gold loan], ” he says.
Gold and personal loans allow the borrower to use the funds as they wish. But for many, gold loans are the more accessible of the two – they require fewer documents, gold is often readily available with the home as an asset, and loans currently have a higher value due to the high prices of the money. gold.
Lower interest rates for gold loans are an added bonus – currently interest rates start at just over 7% and go up to 29%, depending on the term and options of the loan. refund. In comparison, interest on personal loans varies between 8% and 26% per year.
Gold loans are expected to grow at a much faster rate than personal loans. “We are forecasting 10-15% growth this year,” said Vice President Nandakumar, CEO of Manappuram Finance, a non-bank finance company specializing in gold lending.
Gold loans are also easier to access now as mainstream commercial banks have tightened their coffers. A history of bad lending decisions has left Indian banks with one of the highest bad loan ratios in the world. And the pandemic has only made matters worse, leaving banks wondering if more borrowers are at risk of defaulting. Result: banks do not lend as much as before.
In 2019, Indian banks approved 6% more loans than the previous year, according to the national rating agency Crisil. This year, they are expected to make only 1% more loans than usual – historically, loan growth has been in the double digits.
“Small businesses come to us because bank loans will take time. They need short-term working capital because the foreclosure has dried up all payment streams, ”said George Alexander Muthoot, Managing Director of Muthoot Finance, one of the world’s largest gold lending companies. in India.
Even regular banks that specialize in gold lending are reaping the rewards – the Federal Bank and Indian Bank have seen demand for gold loans increase tenfold, mostly in small towns.
And experts predict that gold lending will continue to rise as prices rise. Prior to the lockdown in March, that price was $ 38 per gram – right now it’s around $ 44 per gram. So a gold loan would now bring in almost $ 7 more per gram than in March.
“Rising gold prices make borrower and lender happy,” says Somasundaram PR, managing director for India at the World Gold Council.