Businesses Opt For Gold Loans To Tide Over Covid-Induced Liquidity Crunch

Gold LoansDue to the ongoing pandemic (Covid-19) Gold prices are hitting the sky, and the demand for gold loans has increased too.

The individuals and small businesses are facing liquidity challenges as an effect of business losses and salary cuts due to Covid-19, banks and non-banking finance companies (NBFCs) are witnessing a huge jump in demand for gold loans over the last few weeks.

Saurabh Kumar, Head of Gold Loan at IIFL Finance said, “Most of the gold loan customers are small and medium businesses. Post-Unlock, they need capital to restart and grow,” further he said, “Gold is an easy loan where the disbursement process can be completed over the counter within 30 minutes. That’s why customers, especially farmers, traders and small businessmen, prefer this product.”

IIFL Finance’s gold loan book grew by 47 percent y-o-y to ₹9,125 crores as of March 2020. It expects a surge in demand in Q2 and Q3, with lockdown restrictions easing across the country.

George K John, EVP, ESAF Small Finance Bank, also said the bank is seeing high demand in daily gold-loan demand ever since it restarted disbursements from the end of April.

John said, “There are multiple reasons for the spike in gold loan demand. Primarily, small traders are raising gold loans to rebuild their business and manage their cash flows,” further he added, “There could also be a percentage of people who opt for gold loans instead of personal loans since the process is quicker and the value of gold is also on the higher side.”

ESAF’s retail assets are from home, auto and personal loans cover some part while the remaining 65 percent of assets are from gold loans. The average ticket size of gold loans in ESAF is ₹82,000 with the gold loan interest rates starting from 9.25 percent onwards.

The surge in gold prices over the last few months is also believed to be one of the factors driving individuals to monetize their unutilized gold to tide over the liquidity crisis. On Wednesday, gold spikes to ₹48,982 per 10 g. The price has rallied more than 25 percent over the last six months.

Rural demand

Rural India remaining unaffected by the pandemic and agricultural activities picking up with the hope of a good Kharif season ahead, lenders are witnessing a spike in demand from rural areas.

“One of the reasons for the spike in gold loan demand is due to the commencement of agricultural activities. We are seeing the increasing trend in our rural & semi-urban branches,” said N Kamakodi, MD & CEO of City Union Bank.

Around 10 percent of CUB’s loan portfolio is from jewel loans, out of which a significant portion comes from rural and semi-urban branches.

Risk aversion move people towards Gold Loans

Due to low lending by banks and NBFCs because of risk aversion is also believed to be one of the major reasons forcing people to move towards gold loans.

A recent SBI Ecowrap report on the lockdown, moratorium, and consumer habits noted that there might be a conscious shift in the portfolio of bank loans from unsecured loans to collateralized loans, which the report said, augur well for minimizing the risk in current times.

State Bank of India (SBI) official requesting anonymity said, “Gold loans are picking up because there is no other avenue available for anybody at this moment”.

He added, “In this stress-based scenario, gold loan is a very lucrative business for banks since it is 100 percent collateralized and chances of NPA is almost NIL,”.

Currently, the rate of interest on gold loans starts from 7.5 percent and can go up to 29 percent depending on banks and NBFCs, while the interest rate on personal loans could be even higher.

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