India’s Gold Loan Market Examining the Growth and Potential

India's Gold Loan Market

India's Gold Loan Market

Back in 2019, the valuation of the gold loan market in India was INR 2,921.42 Billion and it is estimated to achieve a valuation of INR 6,275.40 Billion by 2025.  The stats define the strong growth India’s gold loan market is experiencing, due to rising credit demand, the presence of affordable gold loan options, and government initiatives.

But firstly,

Gold loans are collateral-backed lending options wherein individuals pledge their gold jewelry, coins, or bars as collateral to obtain funds from lenders. The loan amount, usually a percentage of the gold’s market value, is disbursed by the lender.

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Looking Into The Demand For Gold Loan- An Expanding Gold Loan Market

The Demand For Gold Loan

The data showcases the increasing popularity and demand for gold loans as a preferred borrowing option in India:

  • Approximately 1,81,881 tons of gold have been mined throughout human history as of 2011, with around 52% of the mined gold used for jewelry.
  • Indian households are estimated to hold between 24,000 and 25,000-kilogram tons of gold, accounting for up to 40% of the nation’s GDP in 2019.
  • Rural India holds 65% of India’s total gold reserves, indicating a significant amount of gold is held in households and can potentially be utilized.
  • Loans against gold jewelry have seen substantial growth, with the total credit amount increasing from around Rs 34,000 crore in March 2020 to nearly Rs 61,000 crore in the 2020-21 fiscal year, which coincided with the pandemic’s onset.
  • By the end of March 2022, the credit amount further increased by approximately one-fifth to approximately Rs 74,000 crore.

This significant expansion in the gold loan market in India is notable considering the personal loan market growth rate of 10 to 12% during the same period.

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Major Drivers For The Demand Of Gold Loan In The Indian Market

Gold loans offer several benefits increasing the demand for gold loans in Indian Market, including:

Gold Loan In The Indian Market

Quick Access to Funds:

Gold loans provide a convenient way to access funds quickly by leveraging the value of your gold assets.

Multipurpose Use:

You can utilize gold loans for various purposes, such as meeting personal or business financial needs, funding education, medical expenses, or home renovations.

No Credit Score Requirement:

Unlike traditional loans, gold loans do not require a credit score check. Your eligibility is primarily based on the value of the gold you pledge.

Lower Interest Rates:

Typically offer lower interest rates compared to other types of loans, making them a cost-effective borrowing option.

Flexible Repayment Options:

Gold loans offer flexibility in repayment which allows you to choose the repayment tenure that suits your financial requirement.

Minimal Documentation:

Gold loans involve minimal documentation, making the loan application process quick and convenient.

Potential Gold Value Appreciation:

If the value of gold appreciates over time, you may benefit from the potential increase in the value of your collateral.

Utilities of A Gold Loan

Gold loans can be used for various purposes, including:

Meeting Financial Emergencies:

Gold loans provide quick access to funds for addressing unexpected financial emergencies like medical bills, urgent home repairs, or unforeseen expenses.

Business Expansion:

Borrowers can utilize gold loans to finance business expansion plans, purchase equipment, or meet working capital requirements.

Education Funding:

Gold loans can be used to cover educational expenses, including tuition fees, books, and other educational-related costs.

Debt Consolidation:

Borrowers can use gold loans to consolidate high-interest debts into a single loan with a potentially lower interest rate, helping to manage and repay debts more effectively.

Wedding Expenses:

Gold loans are often availed to finance wedding-related expenses, such as venue bookings, decorations, catering, and jewelry purchases.

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Final Thoughts

The loan market has witnessed substantial growth, which can be attributed to various factors. These factors encompass escalating household income, enhanced credit accessibility, and favorable policies implemented by the government.

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Q. What is the loan-to-value (LTV) ratio in gold loans?
In 2020, the Reserve Bank of India (RBI) raised the LTV threshold for lenders, enabling them to lend up to 90% of the gold’s value, as opposed to the previous limit of 75%.
Q. How does the gold loan market work in India?
Gold loan companies provide financing up to 60-70% of the gold’s value (RBI LTV limit is 75%). They pledge the gold with banks, securing funding over 80% of its value. With a large interest margin, gold loan companies charge rates ranging from 18% to 32% annually.
Q. What is the future of gold loan companies in India?
According to data from the Reserve Bank of India (RBI), the disbursement of gold loans has experienced a twofold increase, rising from Rs. 46,971 crores in September 2020 to Rs. 80,617 crores in September 2022. It is projected that this amount will reach Rs. one lakh crore rupees during the current year.