Money & Banking

Published: Dec 29, 2021
Updated: Dec 29, 2021

Gold loans lifeline in Covid times

The pandemic's crippling effect on various segments of the economy, especially - small businesses, has led to a huge spurt in gold-pledged loans to ease short-term capital requirements. Indicative of this trend is the SBI's 339% spurt in gold loans and Mannapuram Finance's huge increase in gold loan payouts in recent times. However, as Shivanand Pandit notes, there are inherent risks for both borrowers and lenders.

If individuals cannot make loan repayments, the pledged gold is sold. On the other hand, lenders may not be able to redeem the gold, leaving them without a protection net. Also concerning is the huge rise in volume of gold auctions, as indicated by Mannapuram Finance's auctioning of Rs 1,500 crore Shivanand Pandit worth of gold in just Q1FY22. Gold loans have surged nearly 86% since March 2020 when a deadly virus attacked humankind. Although credit offtake by the business and service sector stayed low over the last 12 months, retail borrowings impelled by gold loans have shown a substantial uptick. The gold loan dues mounted by around 77%, or Rs 27,223 crore, to Rs 62,412 crore by July 2021 on a yoy basis. As of June 2021, the State Bank of India has narrated an approximately 339% growth in gold loans!

Public sector banks, which were not eager on gold loans hitherto, have discovered this as a chief growth zone. They have tapped this opportunity and increased the lending because recovery in this segment is not burdensome. Furthermore, the Reserve Bank of India's step to raise the loan-to-value (LTV) ratio for such advances from 75% to 90% has also aided the outlier increase in gold loans.

SMALL BIZ STRESS

The huge rise in the gold loans could be an indicator of stress in rural areas, the small revenue set, and micro-units. Small business firms have also experienced severe stress due to the pandemic's crippling effect on various segments of the economy, especially small businesses, has led to a huge spurt in gold-pledged loans to ease short-term capital requirements. Indicative of this trend is the SBI's 339% spurt in gold loans and Mannapuram Finance's huge increase in gold loan payouts in recent times. However, as Shivanand Pandit notes, there are inherent risks for both borrowers and lenders.

If individuals cannot make loan repayments, the pledged gold is sold. On the other hand, lenders may not be able to redeem the gold, leaving them without a protection net. Also concerning is the huge rise in volume of gold auctions, as indicated by Mannapuram Finance's auctioning of Rs 1,500 crore Shivanand Pandit worth of gold in just Q1FY22. lockdowns enforced by the Centre and various state governments. In addition, job losses, reduction in salary income, and decline in consumer demand have obstructed the cash flow for many firms across industries, and their capacity to pay their workforces.

Many people find it comfortable to acquire loans by pledging gold. One of the steady characteristics of the Indian gold market is pledging of gold as security to meet fiscal requirements. Conventionally, people utilise gold loans to meet health, education and marriage expenditures. Currently, less than 15% of family savings in gold is leveraged at any point of time for a short-term loan to handle crises, whether personal, medical or business-related. Typically, in times of economic pressure, exploitation of family savings in gold for loans upsurges by 20-25%. Small business units also use this avenue to make up their fund requirements and, probably, even working capital - from both formal and informal lenders.

The World Gold Council has also stated that demand for gold loans, both through banks and non-banking financial entities, has sprouted because of the adverse economic impact of the pandemic, and the amount of gold loans is expected to grow substantially in the forthcoming years. Manappuram Finance's total gold loan payouts increased to Rs 263,833.15 crore in the financial year 2020-2021 from Rs 168,909.23 crore in the previous financial year 2019- 2020. It had around 26 lakh gold loan customers as of March 31, 2021. Also, notwithstanding a 10-12% drop in gold prices, Muthoot Finance's loan book grew considerably.

TEMPTING, BUT RISKY

The majority of public sector banks are taking to the gold loan business in a big way. This comes as a booster dose for many people. Public sector banks also charge less interest on such loans compared to non-banking financial companies. As against a rate of around 10% levied by NBFCs, PSBs offer such loans at 7.5%. However, individuals or businessmen should not opt for gold loans blindly only because of low rates of interest. Borrowings against gold could be both a good and a bad move, depending upon who you are and what you are borrowing for.

Borrowing against gold for meeting consumption requirements or to fund marriage expenses is not a prudent idea if the income is at a danger level. If the borrower fails to honour repayment of loans, including interest, the financier sells the gold pledged by the borrower. Yet, it is sensible to avail a gold loan for financing short-term working capital requirements and to shorten a stretched payment cycle.

Small businessmen whose needs are generally driven by a rise in the payment cycle and who look to bridge the gulf for a few months may count on gold loans. However, interruption in cash flow should be temporary. If the business feasibility is not crystal clear, even small entrepreneurs should not choose a gold loan. In this pandemic-struck economy, numerous smalland medium-scale businesses have lost business sustainability and are fighting to manage regular payments. Therefore, a decision regarding additional borrowings without a probability of business endurance may not be a sane step. People should think of liquidating a portion of their gold possessions if their revenue inflow has been adversely affected and debt has become a matter of concern. Importantly, they should not get sensitive about selling a portion of gold to repay a loan, particularly when gold prices have increased during the previous 15 years. Overall, one has to be rational about taking gold loans.

RISK FOR LENDERS TOO

All this has generated another set of problems. Numerous lenders of gold loans will not be able to redeem the gold, leaving them without a protection net. The gems and jewellery segment is also in the doldrums and has earlier requested a moratorium on interest payments.

Therefore, lenders of gold loans may soon witness pressure from both the retail and wholesale part of the play. Moreover, due to an increase in the limits on gold LTVs, there is a flight to informal sources of finance. Approximately 65% of the gold loan market is accounted for by the unorganised sector.

One more concern is the volume of gold auctions. During the first three quarters of the financial year 2020-2021, Mannapuram Finance had auctioned Rs 8 crore worth of gold. This soared to Rs 404 crore in the last quarter of the same financial year. Shockingly, this shot up to Rs1,500 crore in the first quarter of the financial year 2021-2022. Unfortunately, details regarding gold auctions across players are not obtainable in the public domain. Also, banks generally do not reveal whether they resorted to this path or not. Moreover, other loans availed by gold loan borrowers also come under pressure. As lenders, banks or NBFCs never disclose non-performing asset data segment-wise. Due to this, it is not easy to find out the exact extent of sector-wise pain. Many organisations are not ready to record the segment-wise NPAs because of inherent sensitivities.

As a final point, low confidence of consumers, business reaction to the looming fear of a third wave of the deadly virus, and the slow pace of economic recovery have made the outlook for the second half of 2021 very uncertain. Although the speed of vaccination and outcomes of many surveys reveal that we may learn to live with the virus and the economy may become more resilient, the next few quarters may throw up surprises for the gold loan segment.

(Mr. Pandit is a tax specialist, financial adviser, guest faculty and public speaker based in Goa)