gold loans: Hurry for gold loans that Indians seek refuge for slowdown

By Swansy Afonso

Indians can borrow more against their stash of gold as the world’s largest Lockdown traveling financial stress in an economy set for its first contraction in four decades.

Indians are the largest consumers of gold after China and possess the largest cabinet of precious metal. Gold is both an insurance policy and a retirement plan in a country that lacks robust social welfare systems or broad access to formal credit. And with economic activity stalling virtually silent after Prime Minister Narendra Modi ordered a 40-day nationwide shutdown to fight coronavirus, more Indians are likely to turn against gold loans companies to raise money for precious metals.

“Recycling and collateralised loans against gold can be expected to grow exponentially in the next few quarters,” says P.R. Somasundaram, chief executive of India at the World Gold Council, said this in an interview. “There will definitely be strong growth in this area for two reasons: prices are rising – they are getting more for the same grammar – and the second is that banks will not be able to lend just like it. ”

The shutdown is seen as pushing Asia’s third-largest economy toward its first full-year entry since 1980. As cash flows from many companies dry out in the absence of any major fiscal support, production and consumption have suffered, and many companies will be forced to cut jobs to limit costs.

“Gold loans will be a great product,” Somasundaram said. “It’s possible that gold will become a tool for reviving many small and medium-sized businesses and household wealth.”

In India, banks were under pressure even before the outbreak due to a shadow banking crisis and a prolonged slowdown in economic growth. The country also has the world’s worst bad debt ratio with traditional lenders. This was big before earlier this year with the largest ever banking failure in the country when authorities seized Yes Bank Ltd.

“Once the lockout is completely lifted and travel restrictions removed, we expect a good flow of customers to our branches,” George Alexander Muthoot manages Muthoot Finance Ltd., one of India’s largest gold loan companies, said this in an interview. He expects 5% to 10% growth this financial year from current assets under management of Rs 40,000 crore.

The company has raised Rs 6,000 crore in the last six months from global markets and its liquidity position is comfortable, he said. The second largest gold lender, Manappurram Finance Ltd., also expects to meet any increased demand for loans after raising $ 300 million in January.

“Demand for gold loans can increase in the wake of the shutdown as borrowers’ risk profiles deteriorate and lenders become risk averse,” said V.P Nandakumar, Manappurram Finance CEO, in an interview. “With many non-bank finance companies facing liquidity challenges, lending will be further limited and gold loans can then become the recurring option for borrowers who are denied access to their regular channels,” he said, adding gold loans could grow 10% to 15% this year.

While the price of gold is rising to historic highs in local markets, some customers are choosing to repay their gold loans and sell the metal to take advantage of these unprecedented prices, he said.

Even as people recycle more of their old gold, India’s demand for precious metals will suffer this year, with an industry body expecting sales to fall to its lowest in 25 years. The World Gold Council, which in January estimated demand between 700 and 800 tonnes by 2020, said it would not be able to quantify the impact of the virus on Indian demand in its latest quarterly update on Thursday.

“We are in the midst of a crisis,” Somasundaram said. “The only honest thing we can say is we just don’t know.”

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