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Gold prices: Gold loan market expanding fast, to reach Rs 4.6 lakh crore in FY22

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Kolkata: Scores of Indians are using their gold holdings as collaterals to meet their financial needs, cashing in on rising gold prices amid the pandemic and economic recession, and helped by branch network expansion and greater technology use by non-bank gold loan providers.

The trend is expected to continue and help the organised gold loan market to grow 15.7% a year to reach $62.8 billion, or about Rs 4,61,700 crore, in 2021-22 from $47 billion, or Rs 3,44,800 crore, in 2019-20, a report released by the World Gold Council on Tuesday said.

The report, ‘Gold loans help India weather the Covid-19 storm’ said a 28.8% rally in domestic gold price this year and the need for quick credit among small businesses will spur gold loan growth.

Many banks and non-banking institutions target this product segment due to its acceptable risk profile.

While unorganised lending has always coexisted with gold markets in India, over the past decade several banks and established non-banking finance companies have entered the segment and made institutionalised gold loans ubiquitous.

Somasundaram PR, managing director, India, of World Gold Council, said the recent rise in demand for gold loans through banks and NBFCs started in July 2019 when prices of the yellow metal started moving up sharply, though the Covid-19 outbreak gave it a further boost.

Muthoot Finance and Manappuram Finance, two of the country’s top NBFCs focused on gold loans, expect their gold loan asset under management (AUM) to grow by 15 -20% in the current financial year, the WGC report said.

The 28.8% rally in domestic gold price so far this year has led to increased demand for gold loans. Borrowers have benefited from higher loan value for the same collateral while lenders have benefited from lower loan-to-value (LTV) ratios on their existing loans and higher demand.

With a higher gold price and greater liquidity needs amid the pandemic blues, it is believed that Covid-19 would induce higher gold recycling from consumers. However, most people use their gold holdings as collateral to obtain their financing needs rather than outright selling. Also, the rural economy has performed strongly this year, reducing the need for distress selling.

Technology is seen as a key enabler in the growth of the gold loan market. Some gold loan NBFCS have embraced an online gold loan scheme that has got a good response.

More can be done in this area with launch of self-serving kiosks and gold valuation machines in branches and public locations, use of e-KYC, and enabling loan disbursement and repayments through e-wallets and prepaid cards, experts said.

Gold is a preferred savings for Indian households. It provides capital preservation, liquidity and source of funding during bad times, supporting the relevance of gold as a strategic asset.

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