Home / Money / Personal Finance /  Why banks are promoting gold loans

Umesh Patil, a farmer in Maharashtra, pawned 40 grams of gold jewellery to raise 1.30 lakh to buy supplies needed to plant his next crop. Many Indians are using gold to secure loans, bankers and industry experts say, as banks are otherwise increasingly unwilling to lend during the coronavirus pandemic due to fear of the loan souring.

"State-run banks were seeking lots of documents for crop loans and furnishing them all wasn't possible quickly," said Patil, whose farm is in Sangli district, nearly 400 km from Mumbai.

"So I decided to pawn jewellery. I got a loan from a local co-operative bank in just an hour."

Using gold as security is not unusual in India, but gold-backed loans are becoming more popular with banks, which tend to consider them safer than other unsecured borrowing.

India's economy is expected to contract this financial year as the pandemic ravages activity worldwide, and there are growing concerns that people will struggle to repay riskier business and personal loans.

Overall loan growth in India's banking system has already been decelerating and is expected to hit a multi-decade low of 0 to 1% in this financial year due to the fallout from the pandemic, said credit rating agency Crisil.

"As banks could exhibit greater risk aversion in the current context, gold loans would be a convenient route for many customers to raise liquidity and working capital," said Somasundaram P.R., head of the World Gold Council's Indian operations.

George Alexander Muthoot, managing director at gold-financing company Muthoot Finance, said he was seeing demand "from all quarters" as people took out short-term loans to tide over uncertainties. He said the average gold loan was around 40,000.

Several state-owned and private banks are also coming out with promotional offers around these loans to lure customers.

"We're actively promoting gold loans and seeing good traction," Ashutosh Khajuria, the chief financial officer of Federal Bank. said.

"We may be able to clock in the same growth as last financial year of 29% or even higher."

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