Gold loan to ease cash crunch? Pledging vs selling is a key debate

Bankers observe that April and May are typically the busiest months for gold loans, as women pledge their jewels to pay their children’s school and college fees. With the pandemic, though, the patterns have all changed and gold loans have seen heavy and steady demand over the past one-and-a-half years amid a severe cash crunch in households.

Now, after the second wave of COVID and the resultant lockdown, the pent-up demand is translating into brisk business at the gold loan counters of banks and non-banking finance corporations (NBFCs). India’s rampant unorganised gold loan industry — comprising crores of small-time pawn brokers — is also super-busy now. Many middle- and lower-income families’ investments have been wiped out by medical expenses. Yet others are trying to get their businesses back on track, and require funds for this.

Surge in demand

The RBI said that in fiscal 2020-21, gold loans of scheduled commercial banks (SCBs) more doubled to ₹60,464 crore, from ₹26,192 crore in the previous year. That was before the second wave of COVID struck. An Indian Express report estimated that in the year up to May 2021, SCBs’ gold loan operations beat the other segments to see a record credit growth of nearly 34%.  Gold loan outstanding with SCBs zoomed over the period from ₹46,415 crore to ₹62,101 crore, it added.

It may be noted that banks account for just a portion of gold loans. A giant portion of it is handled by gold loan firms such as Manappuram Finance and Muthoot Finance. The unorganised sector, from which data is almost impossible to garner, is also a significant player in the sector.

Also read: Looking for a gold loan? Steer clear of informal lenders

Public sector banks (PSBs), which were earlier not a significant presence in the gold loan sector, are now expanding their footprint in it, and this spells good news for customers, said the Indian Express report. While NBFCs typically charge an interest rate of 10% for these loans, State Bank of India charges 7.5%, it pointed out.

Pledging vs selling

But industry experts are increasingly saying customers should carefully exercise the option of gold loans, as selling jewellery may sometimes make better financial sense.

If it is a short-term loan for an immediate business need, a gold loan may help, as it can probably be repaid as soon as business picks up. But, if it is for a long-term need, such as wedding expenses or school/college fees, customers may find themselves unable to pay their dues. In that case, their pledged jewels may end up being auctioned, which could result in a big loss for them.

Even for business needs, gold loans are a bad idea if there is no certainty that cash flows will ease in the foreseeable future, said Indian Express.

If monetising gold presents an ideal way to ease the cash crunch, selling it is a viable idea, it added. Prices have risen significantly over the last 15 years, so jewellery bought a long time back may be worth a good amount now. Experts say it is important to override emotions and choose between pledging and selling gold.