Gold loans spike on pivot to safety

LENDERS ARE MOVING TO GOLD LOANS, WHICH PROVIDE ADEQUATE RISK COVER AGAINST DEFAULT

MUMBAI: The economic repercussions of the Covid-19 pandemic have worried Indians lining up to pawn their gold jewellery for cash, leading to a surge in gold loans by companies such as Muthoot Fincorp Ltd and Manappuram Finance Ltd.

While a large number of borrowers continue to avail of these loans to tide over immediate cash shortages, many lenders are moving away from unsecured credit to gold loans, which provides adequate risk cover against any future default, industry experts said.

The drying up of unsecured loans post-lockdown and the moratorium period has pushed borrowers towards gold loans, said John Muthoot, chairman of Muthoot Pappachan Group. “While owning gold has always been a boon, the higher prices during this period have helped borrowers get maximum value for their gold. Muthoot Fincorp has disbursed loans of about ₹9,000 crore in the three months to June, an increase of 30% from the previous year to almost 2 million customers,” said Muthoot.

Muthoot Fincorp is one of the non-bank financiers of the Pappachan Group.

The record surge in gold prices has allowed borrowers to raise more money against the same quantity of gold. Although data on aggregate gold loan volume is not available, bankers and nonbank financiers said there has been a surge in demand, especially in March to June.

The loan-to-value ratio for gold loans has been capped at 75% by RBI. This essentially means customers can get a maximum of 75% of their value of gold as loans.