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Credit crunch pushes small borrowers to pledge family gold to raise funds

Reuters AURANGABAD/MUMBAI | Updated on August 22, 2019 Published on August 22, 2019

Quick funds: With NBFCs turning cautions to lending, many customers are option for gold loans, say players.   -  iStock.com

Gold loan companies witnessing unprecedented demand for quick funds

Refused loan by a state-run lender and desperate for funds to buy cotton seeds before the summer sowing season window closed, farmer Babasaheb Mandlik ran out of choices. He finally pawned his wife’s gold jewellery.

Mandlik, who owns an eight-acre cotton farm in Maharashtra, pledged 70 grams of gold, almost all of his wife's precious trinkets, in June in return for ₹1.5 lakh.

“Pawning the jewellery was a difficult decision as my wife likes to wear it at festivals and weddings,” 50-year-old Mandlik told Reuters. “I convinced her that we didn’t have any other option.”

Mandlik is not alone. While pawning gold has long been an option for quick funds in a country that is the world’s second-biggest consumer of the yellow metal, several lenders told Reuters of unprecedented demand as people struggle to secure loans from banks grappling with bad debt and a shadow lending industry stung by a liquidity crunch.

The trend, which has prompted some lenders to impose restrictions as risks and borrowing costs rise, has been accelerated by record gold prices. Indians’ penchant for gold spans centuries and is rooted in the Hindu religion. Households own an estimated collective of 25,000 tonnes of gold, which passes from one generation to the next.

Gold price

Domestic gold prices have risen more than a fifth this calendar year, hitting a record high of ₹38,666 per 10 grams earlier this month amid a global rise.

“As a lot of NBFCs (non-bank financial companies) have become cautious of giving unsecured or even secured loans, we are seeing more customers opting for gold loans instead,” said Sumit Bali, Chief Executive Officer of IIFL Finance. “One can obtain a gold loan and walk out of the branch in just 30 minutes.”

IIFL’s gold loan portfolio stood at ₹6,583 crore at the end of the June quarter, up 46 per cent compared to a year earlier. Those pawning their precious possessions are most often independent workers, including farmers and small-shop owners.

Muthoot Fincorp, a leading gold financing shadow bank with 29.8 lakh customers, said its gold loans rose 6.6 per cent between April 1 and July 24 this year to ₹35,800 crore.

“Pledging gold is becoming more lucrative with rising prices. We have seen healthy demand for gold loans in the last few months,” said George Muthoot, Director at Muthoot Fincorp.

Ashutosh Khajuria, Chief Financial Officer of Federal Bank, a private lender, said its gold loan portfolio was at an all-time high of around ₹8,000 crore and is expected to grow further.

Credit squeeze

Indian shadow banks began to face a liquidity crunch following the collapse late last year of Infrastructure Leasing & Financial Services, a major player in the NBFC space. That led to a surge in borrowing costs, forcing NBFCs to freeze, or tighten lending practices.

Some gold lenders who are also NBFCs have not been immune, despite their increased popularity with borrowers and the solid commodity backing their loans.

Manappuram Finance, which has 25 lakh gold loan accounts, last week revealed its cost of funds in the April-June quarter rose to 9.34 per cent from 8.77 per cent a year earlier.

Muthoot has independently decided to trim the maximum loan amount of 75 per cent of gold value imposed by the RBI to 70 per cent, citing higher borrowing costs and the need to shield itself from any future volatility in gold prices.

“Pledging gold is becoming more lucrative with rising prices. We have seen healthy demand for gold loans in the last few months,” said George Muthoot, Director at Muthoot Fincorp.

Ashutosh Khajuria, Chief Financial Officer of Federal Bank, a private lender, said its gold loan portfolio was at an all-time high of around ₹8,000 crore and is expected to grow further.

Credit squeeze

Indian shadow banks began to face a liquidity crunch following the collapse late last year of Infrastructure Leasing & Financial Services, a major player in the NBFC space. That led to a surge in borrowing costs, forcing NBFCs to freeze, or tighten lending practices.

Some gold lenders who are also NBFCs have not been immune, despite their increased popularity with borrowers and the solid commodity backing their loans.

Manappuram Finance, which has 25 lakh gold loan accounts, last week revealed its cost of funds in the April-June quarter rose to 9.34 per cent from 8.77 per cent a year earlier.

Muthoot has independently decided to trim the maximum loan amount of 75 per cent of gold value imposed by the RBI to 70 per cent, citing higher borrowing costs and the need to shield itself from any future volatility in gold prices.

Published on August 22, 2019
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