Businesses opt for gold loans to tide over Covid-induced liquidity crunch

Gold prices are hitting the roof, and so is the demand for gold loans. With individuals and small businesses facing liquidity challenges due to Covid-induced business losses and salary cuts, banks and non-banking finance companies (NBFCs) are witnessing a quantum jump in demand for gold loans over the last few weeks.

“Most of the gold loan customers are small and medium businesses. Post Unlock, they need capital to restart and grow,” Saurabh Kumar, Head of Gold Loan at IIFL Finance said, adding, “Gold is an easy loan where the disbursement process can be completed over the counter within 30 minutes. That’s why customers, especially farmers, traders and small businessmen, prefer this product.”

IIFL Finance’s gold loan book grew by 47 per cent y-o-y to ₹9,125 crore as of March 2020. It expects a surge in demand in Q2 and Q3, with lockdown restrictions easing across the country.

George K John, EVP, ESAF Small Finance Bank, also said the bank is seeing a spike in daily gold-loan demand ever since it restarted disbursements from the end of April.

“There are multiple reasons for the spike in gold loan demand. Primarily, small traders are raising gold loans to rebuild their business and manage their cash flows,” John said, adding, “There could also be a percentage of people who opt for gold loans instead of personal loans since the process is quicker and the value of gold is also on the higher side.”

Around 65 per cent of ESAF’s retail assets are from gold loans, while home, auto and personal loans covers the remaining. The average ticket size of gold loans in ESAF is ₹82,000 with the interest rates starting from 9.25 per cent onwards.

The surge in gold prices over the last few months is also believed to be one of the factors driving individuals to monetise their unutilised gold to tide over the liquidity crisis. On Wednesday, gold hit a fresh high of ₹48,982 per 10 g. The price of yellow metal has rallied more than 25 per cent over the last six months.

Rural demand

With rural India remaining largely unaffected by the pandemic and agricultural activities picking up with the hope of a good Kharif season ahead, lenders are witnessing a spike in demand from rural areas.

“One of the reasons for the spike in gold loan demand is due to the commencement of agricultural activities. We are seeing the increasing trend in our rural & semi-urban branches,” said N Kamakodi, MD & CEO of City Union Bank.

Around 10 per cent of CUB’s loan portfolio is from jewel loans, out of which a significant portion comes from rural and semi-urban branches.

Risk aversion

Sharp decline in incremental lending by banks and NBFCs due to risk aversion is also believed to be one of major reasons forcing people to move towards gold loans.

A recent SBI Ecowrap report on the lockdown, moratorium and consumer habits noted that there might be a conscious shift in the portfolio of bank loans from unsecured loans to collateralised loans, which the report said, augur well for minimising the risk in current times.

“Gold loans are picking up because there is no other avenue available for anybody at this moment,” said a State Bank of India (SBI) official requesting anonymity.

“In this stress-based scenario, gold loan is a very lucrative business for banks since it is 100 percent collateralised and chances of NPA is almost NIL,” he added.

Currently, the rate of interest on gold loans starts from 7.5 per cent and can go up to 29 per cent depending on banks and NBFCs, while the interest rate on personal loans could be even higher.

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