Gold continues to form a large proportion of wealth owned by most Indian households even today. This asset is believed to come in handy in case of any financial stress caused by unforeseen situations like a pandemic. With the onset of the Covid-19 pandemic, this belief has been reiterated among the Indian mindset. The demand for gold loans accelerated in the previous fiscal year and the trend is seen to be continuing even in 2021-22.
Gold loans are seeing high demand, especially from micro-enterprises to meet their working capital requirements and individuals for their personal financial needs. As the economic activity sees a surge combined with the festive season seeing the ease in lockdown restrictions across several states, the gold loan demand is expected to see a continued upward trend. Let’s have a look at the reasons for the glitter in gold loan demand during these trying times while better understanding gold loans and their benefits.
What is a gold loan?
A gold loan is a loan offered against physical gold by certain financial institutions. It is a type of secured loan in which physical gold articles such as jewellery, coins etc. are used as collateral by the borrower to seek liquid funds from the lending institution. The loan is given to the borrower against gold as collateral. One can take a gold loan either from a bank or financial institution.
Why is gold loan demand scaling up in India?
The demand for gold loans in India has seen a surge since the outbreak of the Covid-19 pandemic in March 2020. As the economy suffered a significant impact due to this, there were thousands of job losses, pay cuts, and innumerable emergency health expenses incurred by many across the country. This is when people and small businesses started turning towards gold loans. These loans came in handy once the six-month Covid-related loan moratorium period came to an end. It helped businesses ensure continued operations or even restart operations that were shut down temporarily as a result of lockdowns.
Why are banks promoting gold loans?
Gold loans have helped individuals to sail through stressful times during Covid-19 lockdowns across the nation. With sufficient help from RBI in liberalising various loan-related rules, banks saw a doubling of their gold loan portfolios. To minimise the economic impact of the pandemic on households and small businesses, the central bank increased the Loan To Value (LTV: loan amount to asset value ratio) for loans offered against gold as collateral for non-agricultural purposes from 75% to 90%. This was in effect until March 31, 2021.
What are the benefits of a gold loan?
Here are some of the noteworthy benefits of gold loans in India:
- Faster processing
The primary benefit of a gold loan is that the processing is faster than any other form of personal loan. Since gold loans are backed by physical gold as collateral, banks and lenders are comfortable lending funds much easier. It’s safe for banks or financial institutions since they have an option to sell physical gold in case of default.
- Easy repayment process
Another benefit of a gold loan is the easy repayment procedure involved. This unique feature allows the borrower to choose repayment of the interest amount before the principal amount. Borrowers can repay the principal amount at a later stage or at the time of loan closure.
- Low-interest rates
Most gold loans offer low interest rates since these are secured loans. While personal loans, in general, charge interest ranging between 15% and 18%, the interest rates on a gold loan may start from 13%. This makes the loan more affordable for an average Indian.
- No processing fees
Since gold loans are offered instantly against physical gold as collateral, most banks and lending institutions may waive off processing fees. Many banks may offer zero processing fees to attract more customers towards gold loans.
- Credit history is not an issue
Before granting any loan, banks and financial institutions usually check the applicant’s credit history. If an applicant’s credit history is poor, there are higher chances of the loan being rejected. However, while availing of gold loans, there is generally no such requirement. Since the applicant availing of a gold loan must deposit physical gold with the bank or lender, the latter may not request credit history details Click Here.
Gold loan borrowers can easily overcome any liquidity crises via gold loans by availing these at low interest rates. In gold loans, there is usually no need to follow up with the bank or lender for disbursal. Additionally, there is no pressure on the borrower to arrange money to repay since the physical gold security covers the loan. Gold loans are predicted to attain higher growth in the near future considering the liquidity and convenience that they offer.