Gold loans are in high demand in India. According to RBI data, by October 2024, the outstanding gold loan amount in banks increased by 56.2% year-on-year to ₹54,000 crore. This growth is much higher compared to other loan categories like consumer durable loans, home loans, and vehicle loans.
Total outstanding gold loans reached ₹ 1,54,282 crore by October 18, up from ₹ 1,02,562 crore in March 2024. This represents a 56% year-on-year increase, compared to 13% in October 2023.
Let’s understand why gold loan demand is rising so fast and its impact on the economy.
Reasons Behind the Rise in Gold Loans
- Impact of Rising Inflation Over the past year, inflation rates have surged in the country. In October 2024, the retail inflation rate hit 6.21%, the highest in the past 14 months. Food inflation rose by 10.87%, putting pressure on household budgets.
- Easy Availability of Gold Loans Gold loans are easily accessible as they are secured loans. Banks provide loans by taking gold as collateral, making it cheaper and more accessible compared to personal loans.
- Rise in Gold Prices The rising price of gold has also increased the demand for gold loans. People are renewing their old gold loans to borrow higher amounts.
- Affordable Option Compared to Personal Loans The interest rate on gold loans is lower compared to personal loans. Amid costly credit and high inflation, this option is more affordable.
- Decline in Other Loan Categories
- Home Loans: Growth reduced to 12% this year from 36% last year.
- Vehicle Loans: Growth fell to 11.4% this year from 20% last year.
- Consumer Durable Loans: Loans for items like fridges, TVs, and ACs grew by only 6.6% this year.
RBI Policy for Gold Loan
The Reserve Bank of India (RBI) has several policies for gold loans, including:
- Loan amount: The minimum loan amount for gold loans is Rs. 10,000 for banks and Rs. 1,000 for NBFCs.
- Loan to Value (LTV) ratio: The LTV ratio for gold loans should be 75% or less. This ensures that banks have enough cushion to sell the gold if the borrower defaults on the loan.
- KYC: Borrowers must provide Know Your Customer (KYC) documents, such as proof of identity, address, and income.
- Valuation: The valuation of gold should be done in accordance with the instructions in the RPCD circular.
- Loan sourcing and appraisal: Lenders should ensure that loan sourcing and appraisal are done properly.
- Due Clear: Lenders should ensure that due Clear is done properly.
- End-use monitoring: Lenders should ensure that end-use monitoring is done properly.
- Auction transparency: Lenders should ensure that auctions are transparent.
- Risk weights: Lenders should ensure that risk weights are applied properly.
Sign of Economic Slowdown
The growing demand for gold loans indicates that consumers lack sufficient cash for essential expenses. This has led to a decrease in consumption and investment, affecting GDP growth.
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Beneficial for Banks
While the increase in gold loans benefits banks, it indicates financial pressure on consumers. Experts advise taking any loan only when absolutely necessary.
Conclusion
The rising demand for gold loans shows that high inflation and growing financial needs have made them an important option for people. However, it’s crucial to assess your financial situation before taking a loan. This increasing demand may signal a significant change in the economy, with long-term effects on the country’s financial status.
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Note: Taking a gold loan can be easy, but making a responsible decision is essential.
Disclaimer: Investing in the stock market is subject to market risks. Please conduct your research or consult your financial advisor before investing. The information provided in this article aims to educate and inform the general public, investors, and traders.