THE CURIOUS CASE OF GROWTH IN GOLD LOANS AS REDEMPTIONS SPIKED

Amidst this widespread risk aversion, only the gold lenders stood firm and kept their doors open for everyone. Even during the lockdown, when most lenders had stopped lending, gold loan companies were disbursing fresh loans through digital modes. Safety, or worries about likely defaults, is not an issue for the gold loan companies as the gold collateral (i.e. the jewellery pledged by borrowers) is held in the custody of the lenders and can be easily liquidated in the event of default.

- Shri V.P.Nandakumar

Soon after the first phase of the lock-down was over and NBFCs were allowed to resume operations at their branches, there was much interest in the financial media about how gold loans would hold up in the current scenario where economic activity is at a low and GDP growth is heading into negative territory.

The expectation was that the demand for gold loans would surge in keeping with the wider observation that most lenders in India have become risk-averse and were focused on reducing their exposure to vulnerable customers. This is, of course, the direct outcome of the nationwide lockdown which effectively shut down the economy and which was aggravated by the RBI’s moratorium package, which led to a flight to safety among banks and NBFCs alike. Consequently, small borrowers and businesses were being starved for want of debt capital, be it to restart operations, or pay wages. Their working capital cycle was stretched to breaking points.

Amidst this widespread risk aversion, only the gold lenders stood firm and kept their doors open for everyone. Even during the lockdown, when most lenders had stopped lending, gold loan companies were disbursing fresh loans through digital modes. Safety, or worries about likely defaults, is not an issue for the gold loan companies as the gold collateral (i.e. the jewellery pledged by borrowers) is held in the custody of the lenders and can be easily liquidated in the event of default.