How likely are gold loans to fill the lending gap post-Covid

Gold loans, till mostly an unorganized industry sector, may be uniquely positioned to capitalize on demands for loans in the post-Covid period. This is especially true for both individuals as well as for small business clients. A strong digital footprint and an expanded branch network may be just what’s needed to capture this sizable market segment.

Right now, the pandemic is creating a problem in the availability of loan funds. This is happening because the banks themselves are in a bad shape. Thus, they are keen to give money under a stringent and strict policy, to only those customers who are most likely to pay back loans. Banks may have considerable liquidity, but they are not willing to lend out, except to credit card owners. Because of all this, it is harder to get personal loans right now. Lenders are now looking beyond credit scores. For individuals and small businesses strapped for cash, this has created a unique problem. However, in such a situation, the savior can be a gold loan.

The Economics of Gold Loan in India

According to a KPMG report in January, the Indian organized gold loan market is estimated to be valued at around Rs. 467,200 crore. Approximately, this is 35% of the gold loan market with commercial banks. Small finance banks, Fintech companies and NBFCs are now the key players in the market. The unorganized gold loan sector is thrice as large.

Right now, there are a couple of big opportunities for the gold loan players in the organized market. Firstly, they have a big opportunity to bring unorganized money lenders under the organized market. This will ensure a tighter RBI regulation and a low rate of interest. Secondly, from out of the 22,000 tons of gold which Indian households have right now, only 5% are pledged as deposits of gold loans. 

Now is the time to make the best effort

From all the rest, Muthoot Finance has been the preferred gold loan company for a long time. Compared to many NBFCs, its gold-lending business is de-risked.

How can gold loans rise to the challenge post COVID?

Muthoot Finance company’s chairman, George Alexander Muthoot, admits that after the pandemic, the market scenario can give a big opportunity for gold loan companies in the country. Here is how it can happen.

1. Small businesses will be in need of working capital. Since banks are reluctant to provide new risk for themselves, the role is taken by gold loan companies.

2. Because of the lockdown, payments are delayed to traders, small businesses and shopkeepers. They require finance in the meantime till regular cash starts flowing again. Gold loan can be the better credit choice here.

3. Both Mannappuran and Muthoot Finance are expecting a huge surge in demand for gold loans from retail customers as well. Many families are facing job loss and income reduction. For them, gold loan is the credit choice that is least risky.

4. Gold loans also have the Loan to Value advantage. Companies offering this service are giving 75% LTV. 

For both small businesses and individuals, gold loans may be positioned uniquely to capitalize on the post-COVID demand for credit. A strong digital footprint and an expanded branch network may be able to capture this nascent market.

Which banks give you the best rates for gold loans?

When you are faced with an emergency situation or in a circumstance when you are in dire need of money, you need to get funds as soon as possible. Such circumstances may include medical emergencies, a job loss, etc. You may also need money for not-so emergency circumstances such as your child’s wedding expenses and so on.

Now, here’s the thing: very few of us have an emergency fund strong enough or savings big enough to cover all the things which life decides to throw at us. For all these things, most of us have to rely on loans. The best thing to do in such situations is to take a personal loan. Of course, you can use your investments in financial instruments, but we’d rather you don’t use the latter. If you can, leave those untouched. That is for your retirement. It is therefore far better to take a personal loan.

Amongst personal loans, gold loan is by far the best option as long as you have sufficient gold. This is also one of the safest options for getting credit. At the end of the day, you are not pledging anything big like your home or properties. You are pledging your gold, which is still valuable and has a sentimental value, but even in the far off chance that you can’t repay it, you still can go on normally in life. 

One of the best things about a gold loan is that it gives a lower rate of interest when compared to other personal loans.

Where can you get gold loans?

Both banks and NBFCs give you gold loans. Banks include SBI, HDFC, HSBC and others while NBFCs include Manappuram Finance and Muthoot Finance. 

How much loan can you expect in a gold loan?

The amount you can get for a gold loan varies from one lender to another. This is especially true in case of NBFCs. To get a lower interest rate, you’ll have to shop around a bit. Take your time and browse through what the various lenders are offering. And by the way, don’t just look at the interest rate when picking a gold loan. Pay attention to the terms and conditions, and the other features and benefits as well. Right now, ICICI Bank gives between Rs. 10000 and Rs. 1 crore in gold loans. For SBI, this is between Rs. 20000 and Rs. 20 lakh. Gold loans from Muthoot Finance have gold loans starting from Rs. 1500 without a maximum limit.

Gold loan tenure

Like the total amount, the tenure of a gold loan also differs from one bank to another. HDFC offers tenure ranging from 3 months and 24 months. SBI offers a maximum repayment term of 36 months. 

Interest rate on gold loan charged by banks and NBFCs

Bank / NBFC	Gold Loan Interest Rate	Processing Fee
SBI	7.00% to 7.50%	0.50% + GST
Bank of India	7.40%	Rs.125 to Rs. 300 per lakh
Canara Bank	1 Year MCLR (7.65%)
Bank of Maharashtra	7.35%	Rs.500/- exclusive of GST.
Uco Bank	8.50%
Indian Bank	8.50%
Punjab National Bank	RLLR + 1.95%	0.75% of loan amount
Central Bank of India	MCLR + 0.50% to MCLR + 2.00%	NIL
Punjab & Sind Bank	7.50%
Federal Bank	8.50% onwards
United Bank	1 Year MCLR (9.35%)
Dhanlaxmi Bank	Starting 9.65% (Fixed)
J & K Bank	1 Year MCLR+ 2.00% p.a
Karur Vysya Bank	10.10%
Indusind Bank	10.5% to 16%	Processing Fee - 1%
Kotak Mahindra Bank	10.5% to 17%	Upto 2%
HDFC Bank	9.50% to 17.55%	1.50% + GST
Bandhan Bank	10.99% to 18.00%	1% + GST
ICICI Bank	10% to 19.76%	1% of loan amount
South Indian Bank	1 Year MCLR + 3.65 % o
Muthoot Finance	12% to 27%
Axis Bank	13.00%	1% + GST
AU Small Finance Bank	Up to 24%	1% of loan amount
Manappuram Finance	Max 29%
City Union Bank	1 Year MCLR (14.25%)
Union Bank	MCLR+1.40% to MCLR+ 2.40%
Bank of Baroda	MCLR + Strategic Premium + 3.00%	0.50% + GST
Karnataka Bank	As per MCLR guidelines.