Gold Loans Glitter Again

With gold prices rising, businesses like Muthoot Finance are poised for a strong run

- Samar Srivastava

Demand at Muthoot Finance, India’s largest gold loan company, surged in July and August. As the country got back to work, small entrepreneurs and traders in need of quick working capital rushed to its 5,330 branches across the country to raise money. The lockdown had seen the value of their holdings rise by a fourth and gold loan financiers were offering loans in under an hour. There were also those who had lost jobs and income and were looking to tide over their immediate expenses.

As the pandemic shut traditional avenues of financing, consumers have moved to monetise their gold holdings. Compare this to the cumbersome process of getting a bank working capital loan and it’s not hard to see why demand for gold loans has surged. “Someone takes a loan (against gold) when there is a genuine need,” says George Alexander Muthoot, managing director at Muthoot Finance, disagreeing that his business has gone up only on account of the rise in prices. Instead, the rise in prices has made his business a lot safer as the value of the security held increased.

Over the last decade there has been a growing acceptance of loans against gold resulting in higher numbers. The increase in gold prices recently hasn’t hurt. Over the last decade the gold loan business has also, like several parts of the financial services business, moved from the unorganised to the organised sector. Where earlier moneylenders would charge upwards of 36 percent for loans against gold, banks and non-banking finance companies now charge between 12 and 26 percent. Organised companies stayed largely under the radar of regulators in the 2000s owing to their small size and the fact that they posed no risk to the financial system.