To say that Indians love gold would be to fall short. Over the centuries, families, like temples, have amassed valuable metal.
According to an estimate last year by the World Gold Council, total gold reserves in Indian houses were about 25,000 tonnes, that of any country.
This time-tested investment has regained its popularity as India’s economy recovers from the devastating effects of a global pandemic. When Covid-19 hit, India’s $2.5 billion (1.9 billion pound) economy was already hot due to a banking crisis.
One of the effects was the tightening of liquidity, which led many Indians to use gold as an investment and guarantee.
And they do it more and more to raise funds, says Kunal Shah, an expert in the commodity market.
At a time when classic bank loans are harder to obtain, high gold costs have helped boost the popularity of those loans.
Gold has risen 28% this year to more than 50,000 rupees ($668; 515 euros), equivalent to 10 grams.
The price jump is due to several reasons. On the one hand, Western banks print currencies and buy gold on the foreign market as a long-term guarantee. Second, inventory markets around the world are volatile, leading others to invest in gold, increasing their price. And with interest rates in several countries in negative territory, it is not successful to keep cash in banks.
All of this has affected the value of gold, and experts say its cost is expected to increase in the coming months.
Disha Dinesh Parab, from the western city of Pune, was one of those who relied on gold loans to keep their businesses afloat during the pandemic. For more than 10 years, it has been producing and promoting between 40 and 50 boxes of food a day. But in recent months, due to weak demand in a partially open economy, he had to cut his costs from $1 to 80 cents according to the lunchbox and was only able to sell a quarter of what he used to do.
He said a gold loan is “the fastest and cheapest option available.”
Ms. Parab pledged six gold jewellery in exchange for a gold loan from a local co-op bank for $3,340. You will pay an interest rate of 9.15% consistent with the year for 3 years. If I had opted for a non-public loan, I would have had to pay a steady upward rate at the interest rate, just over 11%, for the same period.
Farmers also see gold loans as a boost. Housilal Malviya, a farmer in the western state of Maharashtra, borrowed more than $5,000 in gold to begin planting on their farms.
“We tried to get a loan from the banks, but they asked too many questions and were reluctant, but the local co-op bank was willing to help [with a gold loan],” he says.
Gold and non-public loans allow the borrower to use the budget as desired. But for many, gold loans are the maximum available of the two: they require less documentation, gold can be easily obtained with space as an asset, and loans are priced higher lately due to higher gold prices.
Lower interest rates for gold loans are an additional advantage: interest rates currently start at just over 7% and up to 29%, depending on duration and repayment options. By comparison, the interest on non-public loans varies between 8% and 26% according to the year.
Gold loans are expected to grow at a much faster rate than non-public loans. “We expect an expansion of 10-15% this year,” said VP Nandakumar, CEO of Manappuram Finance, a non-bank financing company specializing in gold loans.
Gold loans are also less difficult to access now that advertising banks have adjusted their coffers. A history of bad loans has left Indian banks with one of the highest bad loan rates in the world. And the pandemic has only made things worse, leaving banks wondering if more and more borrowers are in danger of default. As a result, banks are not lending as much as they used to.
In 2019, Indian banks approved 6% more loans than last year, according to national ratings firm Crisil. This year, they are expected to provide only 1% more loans than before; historically, the expansion of lending has been double-digit.
“Small businesses come to us because bank loans will take time. They want short-term working capital because the blockade has blocked all payment flows,” says George Alexander Muthoot, managing director of Muthoot Finance, one of the largest gold loan companies. India.
Even banks that specialize in gold loans get the benefits: the Federal Bank and the Bank of India have noticed a tenfold increase in gold loan applications, mainly in small towns.
And experts expect gold loans to continue to increase as values rise. Before the blockade in March, the value was $38 consistent with the gram; lately, it’s about $44 consistent with the gram. For example, a gold loan would now produce about $7 more consistent with the gram than in March.
“The increase in gold makes the borrower and the lender happy,” says Somasundaram PR, managing director for India at the World Gold Council.