Why are gold loan tenures increasing during Covid?

Wednesday, November 11, 2020
Economic Times 
November 11, 2020 
 
An increasing number of business owners and households are recognising gold loans as a source of arranging long-term funds, which was quite uncommon previously as most such loans were closed within a year, gold loan companies said. 
 
Kerala-based non-bank finance company Indel Money has launched a gold loan product with a two-year tenure. 

Executive director Umesh Mohanan said: “The response so far has been quite encouraging. The gold loan demand is also being fuelled by the current credit crunch. Hence, there are ample long-term loan requirements emerging, which can be met with gold loans.” 

The trend is expected to continue and help the organised gold loan market grow to $62.8 billion, or about Rs 4,61,700 crore, in 2021-22 from $47 billion in 2019-20, a report released by the World Gold Council said. 

After the lockdown, Indel has been exploring various fundraising options to keep onward lending active and cater to the gold loan demands, Mohanan said. “We were the initial ones to perform a passthrough certificate (PTC) transaction immediately post-lockdown. We also performed India's first revolving gold loan PTC transaction to expand our gold loan book. We are also exploring co-lending opportunities as well as banking correspondence partnerships,” said Mohanan. 

The trend is expected to continue and help the organised gold loan market grow to $62.8 billion, or about Rs 4,61,700 crore, in 2021-22 from $47 billion in 2019-20, a report released by the World Gold Council said. 

After the lockdown, Indel has been exploring various fundraising options to keep onward lending active and cater to the gold loan demands, Mohanan said. “We were the initial ones to perform a passthrough certificate (PTC) transaction immediately post-lockdown. We also performed India's first revolving gold loan PTC transaction to expand our gold loan book. We are also exploring co-lending opportunities as well as banking correspondence partnerships,” said Mohanan. 

Manappuram Finance managing director VP Nandakumar said: “In the immediate aftermath of the lockdown, we saw an increase in gold loan offtake apparently due to the lack of availability of other credit options given the heightened risk aversion among banks and other NBFCs. But more recently, we are witnessing an uptick in gold loan demand in step with the recovery in economic activities, especially in the rural and semi-urban centres. In fact, we managed to achieve our full-year growth guidance in the half year ended September itself. With GDP growth likely to pick up, we should see good growth in business going forward as well.” 

Manappuram's existing gold loan products offer full flexibility to the customer to extend the gold loan tenure indefinitely. There is no restriction on the number of times the loan can be rolled over — but the interest should be settled in full at the time of rollover. 

Since the rollover takes place at the prevailing loan to value, any shortfall due to the mark to market is to be made good by the customer. On the other hand, if the price of gold has increased, the customer becomes eligible for a higher loan amount, said Nandakumar. 

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