The recent increase in gold prices, driven by developments in West Asia, has made these loans even more attractive by raising eligibility. Thomas John Muthoot, Chairman and Managing Director of Muthoot Fincorp was quoted as saying that people are not afraid of Covid-19 during this year’s festive season, hence the desire to spend.
Gold prices have risen by 4% in the past week due to escalating geopolitical tensions and increased safe-haven demand. Currently, 24-carat gold is priced at around Rs 59,100 per 10 gm, which is 18% higher than a year ago.
Umesh Mohanan, Executive Director and CEO of Indel Money, expects a pent-up demand for gold loans this festive season, projecting at least a 20% increase compared to last year. He also mentioned that whenever gold prices increase, there is always a positive impact on the gold loan business. The erratic monsoon in certain parts of the country may have also affected rural incomes, leading people to borrow against their gold.
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Data from the Reserve Bank of India (RBI) shows that outstanding gold loans stood at Rs 95,476 crore as of July 28, a 23.1% increase from the previous year. This is a significant acceleration compared to the single-digit growth in the preceding 12 months.
In an effort to further support gold loans, the RBI recently doubled the limit under the bullet repayment scheme from Rs 2 lakh to Rs 4 lakh for urban cooperative banks, subject to conditions. India currently holds more than 27,000 tonnes of gold, which is approximately 14% of the world’s gold. Of this, around 5,300 tonnes is pledged.
Gold loans are considered collateralized loans fully backed by a liquid asset, making them easily available with lower interest rates. According to an RBI directive, the maximum loan-to-value ratio for gold loans is 75%, allowing borrowers to raise quick funds without selling their gold.
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Prominent player Federal Bank offers gold loans with interest rates as low as 8.99%, compared to a minimum of 10.49% for personal loans. Documentation for gold loans is also simpler, with lenders only requiring identity and address proof.
However, Rohan Juneja, Managing Director and CEO of Tru Cap Finance, advises caution as any decline in gold prices can have a cascading impact on collateral values and other factors that may pose difficulties for borrowers.