The demand for loan products is likely to increase post-COVID lockdown as borrowers continue to tackle the liquidity challenges. With businesses shut down or are on the verge of shutting down due to hefty losses, there is a need to capitalize on the increasing demand of borrowers, especially small businessmen. While what worries is the fact that banks are too reluctant to capitalize on the demand for all borrowers on all loan products. However, a loan product which has the highest chance of adding to the loan industry is a gold loan. It is expected that the post COVID will see gold loans experiencing a steep rise. The key to capturing this extra market share is utilizing the digital market spaces and building a strong network for gold loan products. With the overall research, it has been seen that there is an upward trend in terms of the gold prices. Due to the current situation, there is ease and people can get a lowest gold loan interest rate on loan.
Understanding The Current Gold Loan Market:
India’s organized gold market consists of 35% of the total market share, which is estimated to be around Rs467,000cr. The key players in the gold loan market are commercial banks, NBFCs and small finance banks being the key players. With the unorganized segment comprising twice as large an organized gold market, the key players in the organized industry must utilize this opportunity to bring other players under the regulated ambit. Thus it would ensure that there are neutral and stricter guidelines for the unorganized sector as well.
The other area where banks need to work is how to utilize the idle gold loan lying with the Indian households for raising loans. Talking about some numbers, Indian households have about 22,000 tonnes of gold, of which rural Indian households hold the primary share. Also, as only 5% of this gold has been pledged for raised loans, there is a huge potential for gold loan markets.
How will the gold loan be a significant factor in such times?
Along with the potential of the gold and gold loan market, what can be the driving force for increasing demand for gold loans is the features and benefits of gold loans.
Features and benefits of gold loan:
- As unsecured loans like personal loans are not as popular these days because of the instability of job and income sources, it has become more challenging to avail them. The reason behind it is that banks are unwilling to lend to the borrowers except to blue-chip borrowers. Also, they have more strict rules when it comes to eligibility of loans. However, gold loans can be easily availed against the mortgage of gold at low-interest rates.
- Another factor why people are willing to take gold loans is that unlike other loan products, a gold loan can be taken without any proof for income and at a time when people are facing severe employment issues. There is instability for income sources; gold loans are certainly an emerging option. Also, a gold loan can be availed if the borrowers have a poor credit score.
Why are people getting attracted towards gold loans ?
1)Hedge against inflation: During such uncertain times, gold and gold loans are considered to be a viable option as they remain unaffected with the surge in inflation. COVID has caught us in the web of uncertainty. Therefore in such times, people need not worry, as returns on gold remain moderate even during the fluctuations in the market.
2)Tangible Resources: Most often, we have built a habit of investing in either real estate or some form of land or property. Gold Loan is a collateral-based loan as well as it is highly liquidating which makes it even more useful.
3) Wealth creation: Gold is such a resource which we can keep with ourselves safe and secure. Almost every family keeps gold ornaments with themselves, and thereby it gets passed down to different generations. In such a way, gold itself is a vital resource and also leads to wealth accumulation.
4) Tax-Treatment: Many people are curious to know about the tax system. Therefore, in the case of a gold loan, there is no tax -relief. It is considered very prudent to keep a copy of the bill after every single transaction is made. A minimal amount of profit can be seen on the gold by way of a capital gain tax.
How are financial institutions making the best of the gold accretion effect
Muthoot Finance and Manappuram Bank are two financial institutions that have experienced the growth in their gold loan stocks. It has been observed that the demand for gold loan products have been quite stable in the lockdown period as well and it is expected that it will further increase in future.
Another reason why there has been a positive trend for gold loan is the utilization of digital gold loan spaces. With the facility of getting gold loans at their doorsteps, borrowers have been provided more convenience to get funds in these challenging times.
Conclusion: As Small businesses will need working capital to resume their activities, gold loan companies could be the natural choice for smaller working capital needs as they are expanding their branch network and digital footprints.
The standard advice is given by many financial advisers in which they have announced that gold is very precious, and adding it to your portfolio can provide higher returns. Gold in itself is also a multiplying asset; it is recyclable. You consume it today, and you will get results about it the other day. Advisers have also advised on keeping and buying a small portion of gold as it will help and has a good resale value and loan value.