India’s banks are racing to lend Aagainst a $1.5 trillion hoard of gold
Indian families, sitting on the world’s biggest private stash of gold, are rushing to borrow against their jewelry as the precious metal rallies to records and the coronavirus pandemic fuels an economic downturn. Now, financial firms and banks are using that demand to lure more customers from pawnbrokers and money lenders.
The added competition could lower borrowing costs for Indian consumers, who in desperate moments of financial stress often pay exorbitant rates to informal lenders to use gold as collateral. Firms like HDFC Bank Ltd. and Federal Bank Ltd. are expanding the loans they make against the precious metal. India’s gold lenders, such as Muthoot Finance Ltd. and Manappuram Finance Ltd., are making it easier for their clients to borrow.
Manappuram is offering gold-backed loans at the customer’s doorsteps via a 24-hour bank network since people are reluctant to leave their homes while coronavirus cases are surging in India. And it has staff and vehicles on standby to service client requests. HDFC Bank is boosting the number of branches offering such loans in rural India, where money lenders remain the norm.
The World Gold Council estimates that Indian households are sitting on a $1.5 trillion hoard of gold, the biggest of its kind, largely made up of jewelry, which families often inherit or are gifted at weddings. Gold is worn at special occasions and can contribute to a substantial portion of the marriage dowries of women. It also doubles up as an insurance policy and retirement plan in a nation lacking robust social welfare systems.As a result, India’s demand for gold-backed loans has only risen as its global price has approached $2,000 an ounce, allowing families to borrow larger amounts against their holdings.In many parts of India, particularly rural areas, the pawning of a woman’s ornaments is often viewed as a last recourse for families who have run out of options.
“Conventionally the country has pawn shops at the end of every street and they have been mostly working with exorbitant margins,” said Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services Pvt. “A professional setup like the gold loan companies, who offer transparency and finer pricing are likely to see huge volumes to move from there.”Lost Jobs: Banks have long had a limited presence in the gold loan industry but are attempting to make bigger inroads this year as other sources of income have dried up.
They want to reach more consumers like Paul Fernandes, who pledged some of his wife’s gold ornaments at a local bank in the coastal state of Goa to pay for his children’s education fees in June.
Fernandes, who worked as a head waiter on a cruise ship, hasn’t drawn a salary in three months since his contract with a U.K.-based company expired in March and he had to return home. The quick loan was a lifeline.