Gold Loans – Gold loans are catching up but banks need to beware the risks

As Indian economy embarks on Unlock 1.0, the big challenge for individuals and businesses is the availability of adequate funding to bridge the revenue gaps. In this light, gold loans have emerged as a viable and workable alternative.

Rush for gold loans

The gold loan market was dominated for a long time by the non-banking gold finance companies. The likes of Muthoot and Manappuram from Kerala were the undisputed names in the business. In India, nearly half the gold loan business is unorganized in the sense that it is outside the RBI regulated channels. In the post-COVID scenario, most banks are bracing themselves for a spurt in gold loan demand. It is easier to get and also safer for the banks to disburse as it is back-to-back lending.

Gold loan arbitrage

One of the reasons gold loan companies like Muthoot have performed so well in the last few months is the renewed demand for gold loans. Most families have a stash of gold and Indian homes are estimated to own 22,000 tons of gold worth a whopping $1.3 trillion. For the financers, it is essentially a secured arbitrage business. They are able to refinance gold at much lower rates and lend at much higher rates. The risk of delinquencies is low as it would mean a slump sale of your gold. Most gold financers make the most of this spread.

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