Always a highly prized asset in the Indian economy, gold has assumed ever greater importance during the COVID-19 pandemic as households and businesses in record numbers are pledging gold as collateral to meet their financing needs.
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Farmers have long relied upon their gold holdings to gain loans that allow them to purchase the equipment and seed they need to plant next year’s crop. Now, small businesses are using gold assets as collateral to borrow working capital. And Indian households are borrowing off their gold holdings to meet expenses for education, health care, and even marriage gifts. So-called gold loans are forecast to rise to $55 billion for the financial year that will end next March 31, up from $47 billion during the 2020 financial year that concluded this past March 31, according to consulting firm KPMG.
Because gold is so revered in India any household with some wealth holds a good amount of gold. More than half of Indian investors own gold, with total holdings in the country estimated to be worth nearly $1.5 trillion. Compare that to U.S. government gold reserves of $493 billion.
Rather than sell gold to make it through the economic challenges presented by COVID-19, Indians prefer to use their gold to borrow funds, understandable since gold has outperformed Indian stocks and bonds over the past year, as well as two-year, five-year and ten-year periods.
This year’s rise in gold prices has increased the amount borrowers can receive for a given amount of gold collateral. Gold loans are also popular because they require no proof of income or prior credit history, have low processing fees, and can be approved within minutes.
Both banks and non-bank financial companies offer the loans. But interest rates are high, by U.S. standards. Non-bank financing companies charge between 11-24 percent annual interest. Banks charge 4 percent for agricultural loans and between 7.5 and 14 percent for other gold-backed loans.
Get in on gold.