Indian Banks Increasingly Offer Gold-Backed Loans As Alternative Lending During Pandemic

Some banks in India are promoting gold-backed loans – that is, loans secured through the use of gold as collateral – as an alternative to regular lending during the ongoing covid-19 pandemic.

Umesh Patil, a farmer in Sangli district in the western Indian province of Maharashtra, pawned 40 grams (1.4 ounces) of gold jewelry in order to raise about $1,720 so he could purchase agricultural supplies to plant his next crop.

"State-run banks were seeking lots of documents for crop loans and furnishing them all wasn't possible quickly," said Patil. "So I decided to pawn jewelry. I got a loan from a local cooperative bank in just an hour."

Such transactions are occurring more frequently in India as banks are increasingly unwilling to lend to risky borrowers. But banks consider gold security as a safer option compared to forms of unsecured borrowing.

Gold is widely held by Indian families in the form of jewelry and coins but rarely converted into cash. The World Gold Council estimates that up to 25,000 tons of gold are lying in Indian households – with rural India accounting for 65% of this amount.

George Alexander Muthoot, managing director at Muthoot Finance, a gold financing company based in Kochi, India, said demand for such loans have been coming "from all quarters" as people take out short-term loans due to, for example, having lost their jobs or seeing their wages cut or postponed.

He said the average gold loan was about $530.

As India’s economy slows, loan growth at banks have crawled – Indian credit rating agency Crisil expects loan growth of barely above zero this year.

"As banks could exhibit greater risk aversion in the current context, gold loans would be a convenient route for many customers to raise liquidity and working capital," said P.R. Somasundaram, managing director for India at the World Gold Council.

A number of state-owned and private banks in India have produced promotional materials on gold loans to attract more customers.

"We're actively promoting gold loans and seeing good traction," said Ashutosh Khajuria, the chief financial officer of Federal Bank. "We may be able to clock in the same growth as [the] last financial year of 29% or even higher."

For example, the State Bank of India offers “personal gold loans” of up to about $26,500. Unlike most personal loans, borrowers don’t need to provide proof of income.

Consultative Group to Assist the Poor, or CGAP, an independent think tank, noted that gold-backed loans can unlock liquidity for the poor of South Asia.

“In some parts of South Asia there is a longstanding tradition of accumulating gold as a preferred form of saving,” CGAP wrote. “Acquiring gold allows small amounts to be accumulated at different intervals; it is not easily lost or destroyed; it is small and lightweight compared to its value; and it is easily divisible into small units which can be sold off as needed.”

CGAP noted that in certain regions of Pakistan and southern India, families often use gold as a means of savings, “so much so that for some segments of society savings in gold greatly outpaces savings via financial products.”

CGAP also pointed out that unlike uncollateralized microcredit lending, gold lending is fully secure.

“Collateralized loans against gold may be expected to grow exponentially in the next few quarters,” Somasundaram of the World Gold Council said. “There will definitely be a strong growth in that area for two reasons: the prices are going up -- they will get more for the same [weight] -- and the second is that banks are not going to be in a position to lend [so easily].”

Somasundaram added: “Gold loans will be a great product. It is possible that gold becomes a tool for [the] revival of many small and medium enterprise businesses and household fortunes.”

Bangalore-based Canara Bank, the fourth-largest public sector lender in India, has introduced a special gold loan business to respond to growing demand, particularly from cash-strapped farmers.

“We understand the depth of the issues our customers are currently facing due to [the] covid-19 pandemic and they are in need of immediate credit support to meet their emergency needs,” said D. Vijay Kumar, general manager of Canara Bank.

“Demand for gold loans may rise in the aftermath of the [pandemic] as the risk profiles of borrowers deteriorate and lenders become [more] risk averse,” said V.P Nandakumar, managing director of Manappurram Finance. “With many non-bank finance companies facing liquidity challenges, lending will be further constrained and gold loans may then become the fallback option for borrowers denied access to their regular channels.”

Nandakumar expects gold loans to increase by 10% to 15% this year.

Muthoot of Muthoot Finance also sees huge opportunities for gold loan products, especially for small businesses that need working capital to revive their operations and families that have suffered income losses.