Indian families, sitting on the world’s largest private supply of gold, are rushing to borrow money for their jewelry as precious metals soar to records and the coronavirus pandemic fuels an economic downturn. Now financial firms and banks are taking advantage of this demand to attract more pawnbrokers and moneylenders customers.
The added competition could lower the cost of borrowing for Indian consumers, who, in desperate moments of financial hardship, often pay exorbitant interest rates to informal lenders to use gold as collateral. Firms like HDFC Bank Ltd. and Federal Bank Ltd. expand their loans against the precious metal. India’s gold lenders like Muthoot Finance Ltd. and Manappuram Finance Ltd. make it easier for their customers to borrow.
Manappuram is offering gold-backed loans on customer’s doorstep via a 24-hour banking network as people are reluctant to leave their homes as coronavirus cases in India rise. And it has staff and vehicles on standby to service customer inquiries. HDFC Bank is increasing the number of branches offering such loans in rural India, where moneylenders are still the norm.
The World Gold Council estimates that Indian households are sitting on $ 1.5 trillion in gold, the largest of its kind, made mostly of jewelry, that families often inherit or are given as gifts at weddings. Gold is worn on special occasions and can add a significant portion of women’s marriage dowries. It also serves as an insurance policy and retirement plan in a country that lacks robust welfare systems.
As a result, India’s demand for gold-backed loans has only increased as the world price approached $ 2,000 an ounce, allowing families to borrow larger amounts for their holdings.
Still, consultancy KPMG estimates that 65% of India’s $ 46 billion gold lending industry is dominated by informal lenders, whose interest rates can range from 25% to 50%. In many parts of India, especially in rural areas, pawning women’s jewelry is often viewed as a last resort for families who are deprived of options.
“Usually the country has pawn shops at the end of every street, and they have mostly worked with exorbitant margins,” said Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services Pvt. “A professional setup like the gold lending companies that offer transparency and finer pricing are likely to move huge volumes out of there.”
Banks have had a limited presence in the gold lending industry for a long time, but are looking to make bigger strides this year as other sources of income have dried up. They want to reach more consumers like Paul Fernandes, who in June pawned some of his wife’s gold jewelry at a local bank in the coastal state of Goa to pay for his children’s education fees.
Fernandes, who worked as the head waiter on a cruise ship, has not been on a salary for three months since his contract with a UK company expired in March and he was forced to return home. The quick loan was a lifeline.
“With no clarity on when the cruise industry will be revitalized after being hit by the virus, I don’t know how quickly I can get back to work,” he said. “We have borrowed for gold in the past and it is our first choice to meet short-term cash needs rather than asking for money from relatives.”
Fernandes, who refused to say which bank he borrowed from, said he would be charged an 8.5% interest rate. He preferred to go to a bank rather than a pawn shop because the banks are safer and charge lower interest rates. He was asked for minimal documentation such as national ID and proof of residence, and the entire credit process took less than an hour.
Gold credits allow consumers to withdraw up to 75% of the metal’s value. Banks can charge interest rates of around 7% to 15%, while Manappuram and Muthoot can charge interest rates of 12% to 29%.
With transaction times for processing gold loans dropping to less than an hour and collateral easy to sell in the event of a default, the Indian market for such loans by at least 34% in two years to 4.6 trillion rupees (61 billion US Dollars) will grow until March 2022, according to an estimate by KPMG.
Virus-induced lockdowns in India have closed businesses and left millions unemployed, causing the Indian economy to experience its first annual decline in four decades. According to the local unit of S&P Global Ratings, bank lending may not grow at all for the year ended March 31, 2021. That makes gold-backed loans particularly important.
HDFC Bank is slowly entering the market and plans to increase the number of branches offering gold loans in rural areas this year from 800 last year. “The availability of the asset and the ease of securing a loan have made this a convenient and workable credit option,” the bank said in its annual report in June.
The Kerala-based Federal Bank, whose gold loans rose 36% year over year in the quarter that ended in June, says they are a focus area. “It is discussed at least once a day by the senior teams,” said Managing Director Shyam Srinivasan in an analyst meeting on July 15.
As competition in the segment increases, non-bank financial firms are offering more innovative products.
“Banks have started to play aggressively in the gold lending sector, which is putting price pressure on non-bank financial companies,” said Jaikrishnan G., director at KPMG. A South Indian non-bank financial firm, Indel Money, is now offering two-year gold loans to provide liquidity to individuals and small businesses hit by the economic downturn.
The longer term compared to the 90 days or 120 days now allowed will help customers retain ownership of the pledged ornaments and reduce the risk of the jewelry being auctioned if repayment obligations are not met within the deadline, Umesh Mohanan said , Executive Director of Indel Money.
In the formal credit sector, Muthoot and Manappuram remain leaders in gold-backed credit. As of March 31, they held 248.4 tons of gold pledged by customers, which is roughly half of the European Central Bank’s reserves. The shares of the two companies have rallied this year, with shares of India’s largest gold lender Muthoot more than doubling since the Indian government announced the first lockdown restrictions in March.
Most demand is from the lower middle class or those with incomes of Rs 13,000-15,000, said VP Nandakumar, CEO of Manappuram.
Pressure from the banking sector could see the gold loan market grow 20-25% this fiscal year as demand is drawn from small businesses and farms, often family-owned, said PR Somasundaram, managing director for India at World Gold Council.
“Gold credits are increasing, but once the lockdown is lifted and some sort of normalcy returns, you will see a big jump,” he said. “When most businesses open, they need capital.”