Why Gold Loans?
Indian culture has always given importance to gold. It features as a part of traditional Indian practices, both social and religious. It acts as a status symbol for most of the Indian communities.
Gold Loans have now become a swift growing presence in the Indian industry. This is mainly due to the reliability of the value of gold. There has been a steep rise in gold prices in the past four years. This proved them to be an excellent substitute in place of property or shares to be used as collateral for loans. It is also easier to evaluate the gold price today as compared to property or shares whose prices may fluctuate depending on circumstances.
How did Gold Loans become popular?
Starting from Kerala based NBFC’s that introduced this into professional financial circles, this practice has now spread to the majority of the significant financial and banking organizations in India. The swift adoption of this practice is majorly based upon the previously unexploited factors about the Indian community and gold.
The majority of Indian communities have the practice of buying and hoarding gold in the form of ornaments, ritual-based articles, coins, or bars. With the abundance of this highly valued metal being stagnated inside personal lockers or hidden vaults, the new venture of starting Gold Loans was something revolutionary.
Though in unprofessional circles, the concept of lending money in exchange for gold was not new. But it lacked the assurance and security provided by the current Gold Loan schemes set up by the banks. The financial corporations now exploit this opportunity to provide loans without any risks to themselves.
This is because the value of gold keeps increasing every year. Even if the borrower defaults on the payment, the financial corporations can recover their losses quickly by liquidating the gold being held as collateral; in fact, they might even make a profit. This makes it much safer for both the borrower and the financial corporations as compared to personal loans that use the property of the borrower as collateral.
Impact of Gold Loans on the social divide in Indian communities
The practices of the rich and the poor vary significantly in India when the topic of savings comes up. The rich generally have methods of investing in a variety of assets like shares of companies, properties in the form of land or housing. The poor sections of the society, however, only invest their meager savings on gold. This thinking is further reinforced by the fact that so many of the traditional practices in India, such as weddings, encourage the use of gold ornaments and ritual articles made of gold.
Gold acts as an asset that helps the poor class of society to be assured of their savings in the form of gold. Gifts in the form of gold are highly sought after in ceremonies. Though the allure of gold might have decreased amongst those belonging to a more sophisticated class of Indian society, among the poor and middle class, it still holds a lot of influence.
Role of Gold Loans in reducing Debt Traps
The rural sections of Indian society, especially the agrarian sections, are highly dependent on loans for their survival. Traditionally they deal with local money lenders who often take their property papers as collateral in exchange for providing them with loans. The interest rate given by these lenders is also extremely high as rules do not restrict them. The high-interest rates make it difficult for the borrower to repay the loan. Yet again, they end up taking a loan for the next year to get supplies for their agriculture practices. This cycle continues further each year, pushing the borrower deeper into debt every year. In the end, the borrow ends up losing their properties to these money lenders.
Advantages provided by Gold Loans
The general preferences of the Indian community have always been to avoid putting gold as collateral for gold. But gold loans have a lot of benefits that can help Indian communities.
The advantages provided are:
Debt trap avoidance: Gold loans are readily available and completely secure in their process. The default of payment only results in the loss of gold instead of debt.
Swift process: The entire process of getting gold loans is fast and hassle-free. In practical situations, it takes less than 20 minutes to complete the whole procedure and avail the loan.
No Asset Depreciation: Unlike other assets that are used as collateral in loans, gold is straightforward to liquidate and evaluate. Due to its nature of being a liquid asset, the process of securing it is also easily completed.
No restrictions: Gold loans are preferable because they provide a transaction wholly based upon the value of gold placed as collateral. There is no constant surveillance for the loans. The only restriction is that the loan should not be used for any anti-social purposes. Compatibility with the unorganized sector: The gold loan process highly benefits those in the informal or unorganized sector. Unlike other loans, gold loans don’t require the borrower to submit the details of their employment.
Moral pressure forbidding default of loan: Most Indian households are extremely attached to their gold articles. In most circumstances, they hold deep emotional attachments as they might be a family heirloom or keep significance to specific events. Due to this, it is highly unlikely for them to default on their loans and abandon the gold article placed as collateral.
Proper application of the value of gold in the global economy: Currently, India ranks first when it comes to the gold that is held by private households. The estimated amount ranges between 15000-20000 tonnes of gold. Before the existence of gold loans in the Indian financial market, all that gold was kept idle in personal lockers and was effectively useless for the economy. Now, however, it is being used to set in motion a chain reaction of economic activity, triggered through gold loans.