NEW DELHI: More than Rs 50,000 crore worth of gold is likely to be pleged this year to procure loans in a rapidly expanding gold loan market, allowing India's favourite hoarded asset to re-enter financial markets and provide a boost to the economy.
According to industry estimates, around 200 tonnes of gold have been used as collateral to raise loans by end November in 2011-12 fiscal.
A back of the envelope calculation shows nearly Rs 55,000 crore worth of the yellow metal has been pledged to raise loans to buy goods, real estate or fund short-term farm credit, providing some momentum to slowing economy.
That stacks up well with about Rs 2.5 lakh increase in commercial bank credit in credit over April-November. "Gold loans help unlock value that is normally lying idle," said Siddhartha Sanyal, chief India economist,Barclays Capital.
"The organised gold loan market is just developing in India and can potentially be a source of liquidity, particularly for the middle and upper-middle class category," he added.
A recent report published by Citibank estimates that the organized gold loan market was worth Rs 50,000-Rs 53,000 crore during 2010-11 and had been growing at a compounded annual growth rate of 35% over the previous 5 years.
Gold has traditionally been used as a store of value, making it a dead asset that has no productive use in the economy, more so as it is mostly imported.
From a lenders perspective, gold is a very secure asset and the value of the loan as a percentage of the collateral is constantly falling due to rising gold prices.
"Propensity of default is also very low because the borrowers are emotionally attached to their gold," said V Sriram, CEO of IMaCS (ICRA Management Consulting Services ).
The loans work out very attractive for the borrowers as well, as the rates charged are much lower than that that on unsecured personal loans.
The average rate of interest on loans issued against gold is 12-24% and time taken to process an application is at most 24 hours, whereas the rates on personal loans go up to 36% and processing takes much longer.
The rising trend of gold loans helps monetize this asset, which John Maynard Keynes once famously called a 'barbarous relic'.
"This (organized gold loans) could further support consumption since gold is no longer considered an asset to buy and hold that is, a 'dead' asset and is now being used as a collateral across income groups", said Rohini Malkani and Anushka Shah.
According to industry studies, since gold loans provide essential funds for investment or consumption purposes, they help generate additional aggregate demand in the economy. "Gold loans are mostly raised for personal uses. For instance, in rural areas gold loans are used for agricultural purposes or to finance consumption.
In urban areas, loans are being raised for either by entrepreneurs or for real estate purposes", said Sreejesh, assistant marketing manager at Manappuram finance, one of India's leading gold finance companies.
By the end of November this fiscal, according to industry estimates, total credit issued by banks grew at around 20%, organised gold loans grew at near 50%, making it an increasingly important source of liquidity.
Economists, however, believe that although gold loans help liquidate a 'dead' asset, its effect on the economy is still limited because it is only a small segment of the loanable funds.
"India is a consumption based economy and if money is stuck in gold it can't circulate in the markets. Gold loans help overcome this but will have a limited impact on the economy because its share is very small", said Rajesh Shukla, Director NCAER Centre for Macro Consumer Research.
The total incremental credit bank credit in the current financial year so far was about Rs 2.5 lakh crore against near Rs 55,000 crore lent by finance companies against gold. But the potential is phenomenal considering the 18,000 tonnes of gold Indians hold.
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