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Chasing the Glitter

The Covid-19 pandemic has led to a surge in gold loans, showing the distressing shape of the economy. But this is an opportunity for public sector banks and they have increased lending in this sector.

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By Shivanand Pandit

Gold loans have surged nearly 86 percent since March 2020 when Covid-19 struck. Although credit offtake by the business and service sector stayed low over the last 12 months, retail borrowings impelled by gold loans have shown a substantial uptick. Gold loan dues mounted by around 77 percent—from Rs 27,223 core to Rs 62,412 crore—by July 2021 on a year-on-year basis. As of June 2021, the State Bank of India has approximately 339 percent growth in gold loans.

Public sector banks (PSBs), which were not eager on gold loans have discovered this as a chief growth zone. They have tapped this opportunity and increased the lending because recovery in this segment is not burdensome. Furthermore, the RBI’s step to raise the loan-to-value (LTV) ratio for such advances from 75 percent to 90 percent has aided the increase in gold loans.

The huge rise in gold loans could be an indicator of stress in rural areas, the small revenue set and micro-units. Small business firms have also experienced severe stress due to lockdowns enforced by the centre and various states. In addition, job losses, reduction in salary and decline in consumer demand have obstructed the cash flow for many firms across industries and their capacity to pay their workforces.

One of the steady characteristics of the Indian gold market is pledging of gold as security to meet fiscal requirements. Conventionally, people utilise gold loans to meet health, education and marriage expenditures. Currently, less than 15 percent of family savings in gold is leveraged at any point of time for a short-term loan to handle crises, be it personal, medical or business related. Typically, in times of economic pressure, exploitation of family savings in gold for loans upsurges by 20-25 percent. Small business units also use this avenue to make up their fund requirements and, probably, even working capital from both formal and informal lenders.

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The World Gold Council has also stated that demand for gold loans, both through banks and non-banking financial entities, has sprouted because of the adverse economic impact of the pandemic, and these loans are expected to grow substantially in the coming years. Manappuram Finance’s total gold loan pay-outs increased to Rs 2,63,833.15 crore during 2020-2021 from Rs 1,68,909.23 crore in 2019-2020. It had around 26 lakh gold loan customers as of March 31, 2021. Also, notwithstanding a 10-12 percent drop in gold prices, Muthoot Finance’s loan book grew considerably.

The increase in gold loan business has come as a booster dose for many people. PSBs also charge less interest on such loans compared to non-banking financial companies. As against a rate of around 10 percent levied by NBFCs, PSBs offer such loans at 7.5 percent. However, individuals or businessmen should not opt for gold loans blindly just because of the low rates of interest. Borrowings against gold could be both a good and a bad move depending on who you are and what you are borrowing for.

Borrowing against gold for meeting consumption requirements or to fund marriage expenses is not a prudent idea if the income is at a danger level. If the borrower fails to honour repayment of loans, including the interest, the financier will sell the gold. However, it is sensible to avail the gold loan for financing short-term working capital requirements and to hush up for a stretched payment cycle.

Small businessmen may count on gold loans whose needs are generally driven by a rise in payment cycle and who look to bridge a gulf for a few months. However, interruption in cash flow should be temporary. If the business feasibility is not crystal clear, even small entrepreneurs should not choose a gold loan.

In this pandemic-struck economy, numerous small and medium-scale businesses have lost business sustainability and are struggling to manage regular payments. Therefore, the decision regarding additional borrowings without a probability of business endurance may not be a sane step.

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People should think of liquidating a portion of their gold possessions if their revenue inflow has been adversely affected and debt has become a matter of concern. Importantly, they should not get sensitive about selling a portion of gold to repay a loan, particularly when gold prices have increased during the previous 15 years. Overall, one has to be rational about taking gold loans.

All this has generated more glitches. Numerous lenders of gold loans will not be able to redeem the gold, leaving them without a protection net. The gems and jewellery segment is also in the doldrums and had earlier requested a moratorium on interest payments. Therefore, lenders of gold loans may soon witness pressure from both the retail and wholesale part. Moreover, due to an increase in the limits on gold LTVs, there is a flight to informal sources of finance. Approximately 65 percent of the gold loan market is accounted for by the unorganised sector.

One more concern is the volume of gold auctions. During the first three quarters of 2020-2021, Manappuram Finance had auctioned Rs 8 crore worth of gold. This soared to Rs 404 crore in the last quarter of the said financial year. Shockingly, this shot up to Rs 1,500 crore in the first quarter of 2021-2022.

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Unfortunately, details regarding gold auctions across players are not in the public domain. Also, banks generally do not reveal whether they resorted to this path or not. Moreover, other loans availed by gold loan borrowers also come under pressure. As lenders, banks or non-banking financial organisations never disclose non-performing asset data segment-wise. Due to this, it is not easy to find out the exact extent of sector-wise stress. Many organisations are not ready to record the segment-wise NPAs because of inherent sensitivities.

As for the outlook of the second quarter of 2021, the low confidence of consumers, business reaction to the looming fear of the third wave of the deadly virus and the slow pace of economic recovery made it look uncertain. Although the speed of vaccination and outcomes of many surveys reveal that we may have to learn to live with the virus and the economy may become more resilient, the next few quarters may throw up surprises in the gold loan segment.

—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa

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