The rise in gold loans: should you pledge your assets or sell some of them?

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Over the last 15 months pandemic reduced household income, especially in the middle and low income categories. The growing monetary crisis and unforeseen medical expenses seem to have prompted people to take out loans for gold. For the 12-month period ending May 2021, the gold loans segment for scheduled commercial banks showed the highest credit growth among all sectors at 33.8%. While many people are looking to monetize their gold holdings to meet their immediate needs, the question arises: when should you consider getting a gold loan?

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How much have gold loans grown?

Over the past 12 months, the outstanding gold loan in banks has grown from Rs 46,415 in May 2020 to Rs 62,101. Since March 2020, when Covid occurred, it has grown 86.4%, or Rs 33,308 crore, according to RBI. Industry insiders point out that this is only a business run by registered commercial banks.

“If you include loans from gold lending companies such as Muthoot Finance and Manappuram Finance, the outstanding debt is much higher. The gold lending segment has become the main growth area for banks as it is easier to obtain, ”said a spokesman for the nationalized bank. Public sector banks, which previously had little interest in gold lending, found this to be a major growth area. The State Bank of India witnessed a rise of 465% to Rs 20,987 crore in the 20-21 fiscal year.

Why leap?

Industry insiders say this could be a sign of stress in rural areas, in low-income groups and microenterprises. Locks imposed by the Center last year and state governments this year have kept small businesses in dire straits. In addition, the decline in demand has impacted the cash flows of many divisions in various industries and their ability to pay their employees.

Pledging gold as collateral to meet financial needs is an ongoing feature of the Indian gold market. Traditionally, households use gold loans to cover health, education and marriage costs, while small businesses use them for their working capital needs.

The World Gold Council said that demand for gold loans, both through banks and non-bank financial companies, has risen in response to the economic fallout from the pandemic. “As a result, the outstanding organized gold loan is expected to grow to Rs 405,100 crores (US $ 55.2 billion) in fiscal 2021 from Rs 344,800 crores (US $ 47 billion) in fiscal 2020,” it said.

Manappuram Finance’s cumulative gold loan payments rose to Rs 263,833.15 from Rs 168,909.23 in the previous year. As of March 31, 2021, it had 25.9 million living gold loan clients. Despite a 10-12% drop in gold prices, Muthoot Finance’s loan portfolio grew 4% quarter-on-quarter. Even during the second wave of Covid, demand for loans is likely to remain strong.

Should I take out a gold loan?

The widespread participation of public sector banks in gold lending has been an incentive for clients. Compared to a rate close to 10% charged by the NBFC, the State Bank of India is offering loans at 7.5%.

But low rates should not be a reason for individuals or small business owners to take out a gold loan. Experts say that getting a loan in these times can be both a good and a bad idea, depending on who you are and what you do.

Taking out a loan for consumer needs or to finance a marriage may not be a good idea if income is under stress. if you cannot repay the gold loan, you run the risk of the financier selling your pledged gold. In the quarter ending March 2021, Manappuram Finance auctioned gold for Rs 404 crore, up from Rs 8 crore in the first three quarters.

However, if the loan is intended to finance short-term working capital needs and to cover an extended billing cycle, it is recommended to take it.

“For a small entrepreneur whose needs are driven by an extended payment cycle and wants to fill the gap within a few months, this is not a bad idea. While gold loans are issued quickly, it would only make sense if the disruption to cash flow is temporary and the person borrows only for funding, ”said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

Banking experts say that if the viability of a business is not very clear, even small entrepreneurs should not take out a gold loan. “In the economy hit by the coronavirus, many small and medium-sized enterprises have lost their vitality and are struggling to cope with regular payments. There is no point in borrowing further just to keep paying the bills without a chance of business survival. If the intention is honest, they may want to turn to IBC for help and start the business again, ”said Srinath Sridharan, corporate advisor and independent market observer.

Is it worth selling gold?

If your income stream is hurt and you have a debt problem, you may want to consider liquidating some of your gold assets. While gold has traditionally been considered an asset in unprecedented times, there is no emotion about selling part of it to pay off a loan, especially given that prices have risen significantly over the past 15 years.

“Don’t let emotions get in between. This must be treated rationally. Since the person has experienced an unprecedented crisis, do not borrow, but sell. You can always buy it back later when the situation improves, ”Dhavan said.

In fact, some of the money should be used for health and life insurance.

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