Amid the economic triggering fears of job and income loss, lenders are likely to be more careful while issuing new loans. As the lockdown has downturned the economy and financial stress, gold loans are turning out to be a wise decision. The lenders from State Bank of India or Canara Bank to small banks like ESAF and Ujjivan have started exploring the market deeper.
After China, Indians are the biggest consumers of gold and hold the largest hoard of precious metal. When the lockdown was announced to combat the coronavirus, people were turning to gold loan companies to raise money against the precious metal. There is growing concern that people will face problems to repay riskier business and personal loans, as India’s economy is expected to contract this financial year as the pandemic ravages activity worldwide.
On May 26, CRISIL said, “India is facing its worst recession in the current fiscal year”. This is India’s fourth recession since Independence and perhaps the worst to date. It is expected that the economy might shrink by 5 percent in the current fiscal year because of COVID 19 and subsequent lockdowns. The gold price has seen some momentum since the start of the year. This is because, equity markets took a beating at the start of the year, which pushed investors to invest in safe-haven assets like gold. Lockdown did not only affect the economy but also harmed the stock market. Many experts advised to reshuffle the portfolio and to invest in gold also. The most ideal approach to put resources into gold in the present circumstance is to decide on a gold-supported ETF or Gold Sovereign Obligations of the government of India.
ESAF and Jana are looking to expand their reach to push its business. Using gold as security is not unusual in India, but gold-backed loans are becoming more popular with banks, as it tends to be considered safer than other unsecured borrowings. There are promotional offers around these loans to attract customers from private and state-owned banks. About 1.2% of India’s total stock gold loan has been pledged as collateral for loans, leaving huge potential for the market to grow, according to consultancy firm Cognizant in January.
