51% Surge in Gold Loan Demand as Personal Loans Become Harder to Access

The demand for gold loans in India has surged by 51%, a trend driven by increased difficulty in obtaining personal loans and the rising price of gold. With the Reserve Bank of India (RBI) tightening policies on personal loans, gold loans have emerged as an alternative for many, given their accessibility and the high value of gold collateral.

Bank data from August revealed that loans against gold jewelry surged by an impressive 51% in September, compared to 15% in March. In contrast, personal loans grew at a slower pace of 11.4% in September, marking the slowest rate in nearly four years, as banks became cautious following the RBI’s increase in risk weights on unsecured loans.

Source: Mint

It’s important to note that, at ₹1.5 trillion, the total outstanding amount of gold loans is significantly smaller than that of personal loans, which reached ₹14.3 trillion as of 30 September. This comparison shows that personal loans remain a much larger part of the lending market despite the recent surge in gold loans.

RBI’s Concerns Over Gold Loan Lending Practices

In September, the Reserve Bank of India (RBI) raised concerns about gold lending practices, citing issues such as reliance on third-party agencies, insufficient due diligence, and limited monitoring of how funds are ultimately used. According to reports, these warnings are likely tied to the rapid growth in the gold lending sector.

Strengthening Compliance Culture

RBI’s focus on compliance, know-your-customer (KYC) regulations, and thorough process monitoring could help build a stronger compliance culture in India, potentially limiting risky lending practices. “We believe this will drive banks and finance companies to better focus on policies and processes, ultimately enhancing the operational resilience of the system,” she noted.

Large Lenders Embrace Gold Loans

Major lenders are optimistic about the gold loan segment. For instance, the State Bank of India (SBI), the country’s largest lender, saw personal gold loans increase by 28.3% year-on-year, reaching ₹38,826 crore as of 30 September.

Growing Demand for Gold Loans: Key Reasons

Personal Loan Restrictions

Recently, financial institutions have tightened their approval processes for personal loans, particularly for individuals with lower credit scores. Regulatory authorities are increasingly scrutinizing lending standards to curb high default rates. As a result, many who would typically rely on personal loans are exploring alternative options, with gold loans emerging as a practical solution.

The Rising Price of Gold

Gold has seen a steady increase in value over recent years, which has led to a rise in its use as collateral. Since gold is considered a safe and appreciating asset, it enables borrowers to secure higher loan amounts than other asset-backed loans. The growth in gold prices boosts loan-to-value ratios, making gold loans more attractive.

Easier Access to Gold Loans

Gold loans often come with more lenient eligibility criteria than personal loans, making them accessible to a broader range of individuals. These loans do not require credit score evaluations as strictly as personal loans, making them ideal for those facing credit-related rejections. With gold as collateral, lenders are more secure, leading to faster approvals and lower processing times.

Lower Interest Rates on Gold Loans

Compared to personal loans, gold loans generally offer lower interest rates. Gold loans from banks or non-banking financial companies (NBFCs) can be as low as 7-8%, while personal loan rates can range from 10% to 24% or even more, depending on the borrower’s creditworthiness. This affordability factor draws more individuals toward gold loans, especially in financial strain.

Flexible Loan Terms and Repayment Options

Many financial institutions offer flexible repayment options for gold loans, making them easier for borrowers to manage. Options such as bullet repayments, monthly interest payments, or even partial repayments attract those who seek flexibility in repayment schedules.

Two Key Reasons for Difficulty Accessing Personal Loans

Stricter Regulatory Policies

In response to rising personal debt and the risk of defaults, the RBI has enforced stricter guidelines for banks and NBFCs. This includes tighter credit checks and higher thresholds for loan eligibility, making personal loans harder to secure.

Risk of Default in Personal Loans

The economic impact of the pandemic has led to increased defaults, prompting banks to be more cautious with unsecured lending. This conservative approach has shifted demand to more secure loans like gold loans.

Impact of Rising Gold Prices on Loan Demand

As gold prices increase, so does the loan amount that borrowers can secure against their gold assets. This has made gold loans more attractive for borrowers who own gold but need cash.

1. Higher Loan Value
   Rising gold prices mean borrowers can leverage their assets for higher loan amounts without additional collateral.
2. Increased Interest from Rural and Urban Borrowers
   Urban and rural borrowers, traditionally inclined toward gold ownership, see gold loans as a way to monetize their assets without permanent loss.

Benefits of Gold Loans Over Personal Loans

• Secured Nature of the Loan
  Since an asset backs gold loans, lenders face less risk, resulting in easier approval and lower interest rates for borrowers.
• Limited Documentation
  With fewer requirements than personal loans, gold loans are easier to obtain, appealing to borrowers needing quick cash.

Challenges and Risks Associated with Gold Loans

1. Risk of Gold Seizure
   If borrowers fail to repay their gold loans on time, lenders can seize and auction off the gold to recover the loan amount. This risk of losing a valuable family asset can be a major drawback, particularly for lower-income households.
2. Impact of Gold Price Fluctuations
   While gold prices have generally trended upward, there is no guarantee that prices will continue to rise. Fluctuations in gold prices could affect the loan-to-value ratio, leading lenders to adjust loan terms or rates in response to market changes.
3. Interest Rates and Hidden Charges
   While gold loans generally have lower interest rates than personal loans, they may still have hidden fees, such as processing or penalty charges for delayed payments. Borrowers need to review loan terms to avoid unexpected costs carefully.

Rising Gold Prices and Future Projections

According to the World Gold Council, spot gold prices climbed from ₹ $6,291.85 per gram on 13 May to ₹ $7,300.57 per gram on 8 November, marking a 16% increase. Over the past year, prices have surged by 41%. A report by Goldman Sachs, dated 29 October, further anticipates that gold prices could reach $3,000 per troy ounce by the end of 2025.

Source: Mint

Tips for Borrowers Considering Gold Loans

1. Evaluate Your Repayment Capacity
   Borrowers should assess their ability to repay gold loans on time to avoid the risk of losing their collateral.
2. Compare Interest Rates and Loan Terms
   Different lenders offer varying interest rates and terms for gold loans. Borrowers should compare offers to find the best rates and flexible repayment options.
3. Understand the Loan-to-Value Ratio
   The LTV ratio determines the maximum loan amount a borrower can receive based on the value of their gold. The loan-to-value (LTV) ratio is capped at 75% for gold loans, meaning borrowers can receive up to 75% of the pledged gold’s value as a loan. However, banks often set internal LTV limits, typically lower than the regulatory maximum.
4. Be Aware of Additional Fees
   Borrowers should review loan terms for additional charges, such as processing or penalty fees for late payments, to avoid surprises.
5. Choose Reputable Lenders
   Working with reputable financial institutions or NBFCs is essential to ensure fair loan terms and secure handling of the gold collateral.

Conclusion

The 51% surge in gold loan demand reflects the changing lending landscape in India, influenced by the accessibility issues surrounding personal loans and the appeal of gold as collateral. This shift underscores the importance of understanding various loan options in today’s financial environment.

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