Money & Banking

Gold loans shine as small businesses, borrowers look for ready cash

Surabhi Mumbai | Updated on July 03, 2020 Published on July 03, 2020

As banks become cautious about lending, gold loans have turned into an easy and quick option for small businesses and individuals looking for short-term cash. With the easing of lockdown restrictions, banks and NBFCs say the demand for such loans has surged in the last one month.

“People want easy and quick finance. A bank loan takes time and credit history can be a problem. Further, people who have availed moratorium not find it easy to get a fresh loan,” said George Alexander Muthoot, Managing Director, Muthoot Finance.

With a sharp rise in demand for pledging of gold in the last one month, Muthoot Finance has a guidance of 15 per cent growth in gold loans this year against 22 per cent growth last year.

“Shopkeepers and MSMEs and other small businessmen are taking loans from us as they want money to re-start their business,” he noted.

Short-term needs

According to VP Nandakumar, Managing Director and CEO, Manappuram Finance, about one-third of its customers borrow for short-term personal needs such as paying for emergency medical care, school fees, social events, contingencies, and other personal requirements.

“We are seeing a pick-up in demand from this category. Demand for gold loans in other segments such as agriculture and MSME’s continues to be subdued,” he noted.

While there has been some increase in demand for such loans, he said demand from new customers is yet to pick up fully as customer footfalls at the branches remain below par. “We expect that once economic activity recovers and once public transport resumes, the demand for gold loans will increase further,” he said.

Of late, a large number of banks have also begun to focus on the gold loan business, including public sector lenders. For instance, Canara Bank has also launched a special business vertical dedicated for gold loans.

Bank loans

Bankers pointed out that many banks have become ultra conservative in the last three to four months due to economic uncertainty.

“The demand for loans has increased among small businesses such as shopkeepers or individuals who need funds to pay for education or to buy white goods. There was some spike in demand for gold loans in May, but it has increased manifold in June across the country. It is an easy, convenient and quick option for getting money in the short term for borrowers, and banks also feel more comfortable. For DCB Bank, the average ticket size of the loan is ₹1 lakh to ₹1.5 lakh,” said Praveen Kutty, Head, Retail and SME Banking, DCB Bank.

A recent SBI Ecowrap report had also noted that consumers are vigorously using gold holdings on their household balance sheet by taking gold loans, and there might be a conscious shift in the portfolio of bank loans from unsecured loans to collateralised loans.

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Published on July 03, 2020
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