India is one of the biggest consumers of gold after China. It has a large stock of gold assets lying with Indian households. To be precise, as per the reports of the World Council, India owns 22000 tons of gold, of which rural households hold a significant proportion. Thus, the use of gold as an investment method and for fulfilling financial needs has a huge potential which is utilized by the borrowers in the COVID 19 pandemic. Making use of Gold EMI can also turn out to be helpful.
With people facing job losses and cuts in their salary and the business has just shut down, it has become challenging to manage the cash crunch for the daily requirement of finance and to revive small and big companies. As the country is opening in phases, people are resorting to borrowing methods to avail funds. However, banks too lack funds or liquidity to provide to the borrowers. In such circumstances, the demand for a gold loan is surging.
Another factor that has significantly contributed to the growth of gold loan products is the increasing prices of gold. Borrowers can now get a gold loan for more money with the same gold. As per the RBI guidelines, banks and non-banking financial institutions can provide up to 75% of the value of the gold as gold loans.
Manappuram Finance, which is one of the largest non-banking financial providers of gold loans, also experienced an increase in the value of gold. In the lockdown period, the demand for the online gold loan was about 70%. During the fiscal year 2020, the company grew at 43% year-on-year and earned a profit of Rs 392.7 Crore for the quarter ending March. As per the M.D. and V.P. of the company it is expected a growth of 8% in the next quarter.
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V.P. Nandakumar, managing director of Manappuram Finance, says that “Demand for gold loans may rise in the aftermath of the lockdown as the risk profiles of borrowers deteriorate, and lenders become risk-averse. He further added that “With many non-bank finance companies facing liquidity challenges, lending will be further constrained and gold loans may then become the fall-back option for borrowers denied access to their regular channels,”.
With the increasing demand for gold loans, the shares of Muthoot grew by 6.2%, and Manappuram climbed as much as 6.8%.
Here are some other reasons why there has been a positive trend in the growth of gold loans.
As businesses are facing huge losses due to the lockdown of the economy for about 40 days, they are resorting to laying off the employees or paying salaries with cuts. A lot of high-tech companies have fired their employees because of no work. As a gold loan can be availed without any income proof and credit score, thus borrowers can easily avail a loan in such circumstances.
The financial institutions have also realized the potential for gold loans. Therefore, they are using this opportunity to provide gold loans at higher loan to value ratios. They are evaluating loans at higher values.
Further, the lenders are giving gold loans at a lower interest rate than regular interest rates on a gold loan. Canara Bank, for instance, said it would give gold loans at 7.85% till the month of June.
One of the highlights among the organized and unorganized gold market is the utilization of online spaces to provide a gold loan. With online gold markets, the borrowers can get a gold loan at their doorsteps sitting at the comfort of their house.
Conclusion: Thus, borrowers are gradually shifting to the gold loan as a borrowing method. You can also avail a gold loan in need of short-term requirements of funds as there is no restriction on end-use of gold loan and you can avail a gold loan with flexible gold loan repayment methods.