Gold’s searing rally this year is driving increased demand for loans based on collaterals of the precious metals, a trend which will likely remain intact in the near future, according to the World Gold Council.
Indian gold prices have risen by 28.8% this year. While borrowers have benefitted from higher loan value for the same collateral, lenders have gained from lower loan-to-value ratios.
Demand for gold loans during the pandemic has been strong both through NBFCs and banks. Banks have aggressively promoted and launched gold loan programs since the covid outbreak to capitalise on this trend.
India’s leading retail bank, State Bank of India, reduced interest rate on gold loans to 7.5% from 7.75% earlier this year for up to Rs 50 lakhs. ICICI bank launched a gold loan program with fixed interest, and a foreclosure option.
Others like HDFC have expanded the number of branches offering gold loans, while still others such as Indel Money have launched gold loans with duration of more than two years.
Banks have reported an increase in demand ranging from 15%-36% during the second quarter, while the average ticket size of gold loans have increased by 10% to 88,000 rupees.
The popularity of gold loan NBFCs (non Banking Financial Companies) have grown over the years due to their convenience, quick disbursals of loans, and lower interest rates. Rising gold prices between 2006 and 2010 further boosted the appeal of such loans.
Emergence of new fintech companies and online gold loan companies have further bolstered the digital landscape of gold loan NBFCs. In early August the Reserve Bank of India increased the Loan To Value ratio to 90% from 75% until 31 March 2021.
“This potentially could further increase the demand for gold loan through banks,” says the World Gold Council.
It says that market research shows that over half of Indian households already owned some form of gold. The average Indian household holds 84% of its wealth in real estate and other physical goods, 11% in gold and rest 5% in financial assets.
Gold remains a preferred investment for Indian retail investors, just behind life insurance and savings. Indians have invested and saved in gold for decades, and total holdings of gold in India are estimated at around 25,000 tons, valued at US$1.45 trillion.
Together with the gold jewellery kept as collateral, the outstanding gold loan NBFCs value have increased exponentially in last decade from just 115.3 billion rupees ($2.43bn) in FY 2009-10 to 760 billion rupees ($10.4bn) in FY 2019-20 at a compounded annual growth rate of 20.8%.