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Recent Trends in Gold Loans

By Chanel Rick - Jul 25,2022
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In the last two years of the pandemic, we have learned a few crucial lessons. 

●      Lesson #1: Everyone should have an emergency corpus 

●      Lesson #2: You shouldn’t sell off assets in a panic 

●      Lesson #3: People can use gold investments as collateral for loans 

During the initial pandemic stage, people quickly realised they had not set aside sufficient funds for emergencies. It caught them off guard and drove thousands of Indians into a panic. Those caught in the middle of company-wide layoffs or sudden hospitalisation found themselves desperately searching for additional income. 

Companies were busy dealing with budget cuts while households struggled to make ends meet. The people who didn’t lose their jobs faced another dreadful reality – pay cuts. It dwindled their funds and nearly wiped out any chance for savings from their monthly income. Moreover, the cost of commodities soared. The simplest of groceries became scarce and exorbitantly priced. 

In the face of these adversities, financial institutions became more reluctant to sanction unsecured loans. Despite the brief moratorium period, the defaulter list only seemed to grow. So, people moved to the next viable solution and opted for gold loans that held their yellow metal assets as collateral. 

The Presence of Gold Investments & Loans in India  

Did you know? India is the world’s second-biggest consumer, after China, with most imports primarily driven by the jewellery industry. In 2021, loans against the gold jewellery (LAGJ) portfolio of scheduled commercial banks (SCBs) increased by 59.1% to ₹63,770 Crores. According to RBI reports, SCBs (LAGJ) portfolio was ₹28,163 Crores in 2019. 

The World Gold Council once stated that Indian households have roughly 24,000-25,000 tonnes of gold. Less than 10% of this figure is available in the organised market, including gold loan companies. A survey by India Gold Policy Centre (IGPC) at IIM Ahmedabad found that over 75% of Indian households own gold assets in various forms. 

Rapid digitisation took over various industries, including the gold loan financing sector. It’s up to banks and other lenders to use the benefits of the new advanced technology available to meet customer demands. The earlier gold loan processes involved tedious paperwork and numerous branch visits, but that’s no longer necessary. People can download apps or visit websites to avail loans from any remote location. 

These developments have diversified the ways investors can purchase or invest in gold. Today, they can choose from digital gold or other forms like Exchange-Traded Funds (ETFs), Sovereign Gold Bond (SGB) schemes and gold-oriented mutual funds. Such gold investments have attracted the interest of different age groups, especially millennials. 

5 Major Recent Gold Loan Trends

The following gold loan trends have appeared in recent times. After the pandemic, several new developments occurred in the gold loans segment. 

1. Increased Demand from MSMEs and Individuals 

The first wave of the pandemic realised the worst fears of businesses and consumers. With minimal funds available, both these groups struggled to manage their livelihood. In an attempt to retain their yellow metal assets amidst panic sell-offs, they opted for gold loans.

As a secured loan, there’s no need for credit checks and minimal documentation. It quickly became a sought-after mode of availing funds, especially for start-ups and self-employed ventures. 

2. Low Losses Caused by NPA and High-Interest Rates 

The gold collateral will be sold to cover those losses if a bank or lender comes across a non-performing asset. Due to this, they’re less reluctant to sanction these secured loans to borrowers. It allows the lenders to support consumers by reducing the load of paperwork and other documents with the ease of disbursal and low interest.

The interest rate on average is 7.5%, attracting the interest of potential borrowers. 

3. Co-relation between Gold Prices and Gold Loans 

In 2021, the first quarter experienced a significant drop in gold prices at almost 12%. It caused a massive change in the loan-to-value (LTV) of existing loans. Banks and lenders quickly acted on this by renewing the existing loan, which inadvertently led to rework and more than usual paperwork. 

Example: When Ms. A applied for a gold loan, her assets had a value of ₹1 Lakh. The bank disbursed a loan of 90% of the price, i.e., ₹90,000. Post the 2021 Q1 drop in gold prices, the value of her gold dropped to ₹88,000. Since the bank had already sanctioned the loan of ₹90,000, they had to renew the loan to match the changes. 

4. Rise of Demand in Gold Loans

Experts believe that the gold loan market will continue to soar until the end of 2022. Gold loan companies, banks and NBFCs have been striving since 2019 to penetrate these untapped markets. With the pandemic making consumers more aware of the benefits of gold loans, there’s a high demand among borrowers. It negated the need to sell off their asset, especially if the fund requirement is for short-term financial obligations. 

The introduction of advanced technologies and digital models in the gold loan segment has unlocked new potential in the market. 

5. NBFCs Growing Participation in Gold Loans Segment 

While traditional banking institutions are still relevant today, people have come to explore loan options via NBFCs owing to lesser regulations. Moreover, they offer faster loan disbursals. On average, these companies experience fewer losses via gold loans. Their efficient risk management practices conduct regular interest collection and auction of NPA-related gold. 

Due to their rising popularity, NBFCs will continue growing and record significant assets under management (AUM) growth in the upcoming months. 

With so many developments in the gold loan segment, it’s no wonder borrowers prefer this form of loan over others. Additionally, timely repayment of gold loans positively impacts your credit score.

Desperately seeking funds but have a poor credit score? Fret not! Visit Bajaj MARKETS today and avail gold loans to finance your needs. 

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