Gold finger feels strong lending pulse

The rise of gold loans marks a welcome shift to secured consumer borrowing. The trend is being driven by high gold prices, low interest rates and tighter rules on unsecured lending. Estimates vary, but Indian households have considerable gold holdings that can be put up as collateral for cheap consumer credit. Provided, of course, that cultural attitudes over holding gold continue to ease. Economic arguments for monetising household good ownership are fairly persuasive. If the rise in gold loans persists, it could become a pathway for inexpensive loans to vulnerable sections of the population. But the combination of factors driving the trend may not endure as gold prices are likely to stabilise with global economic uncertainty abating.

The credit market is recovering from the regulatory squeeze on unsecured lending to households and will find relief in growth of gold loans. As volumes rise, more of the lending will move towards formal sources, which makes it easier to oversee. The business segment is scalable given Indian households' appetite for physical gold as a hedge against inflation. From a systemic standpoint, gold loans contribute to financial market stability, where unsecured lending tends to increase risk. Gold loans will, thus, be favoured by regulators over riskier loans.

Limits on the growth of gold loans will be imposed by rising household indebtedness. It affects repayment capacity as well as retail gold purchases. Surge in gold loans will also taper off as interest rates harden. For now, though, the stock of gold loans has surpassed outstanding credit card debt, which marks a point of inflection in borrowing behaviour. This should help lenders to clean up their unsecured debt portfolios and help prevent a recurrence of aggressive lending. Since borrowing against jewellery is broadening geographically, lenders can draw up their gold loan strategies at the national level. They can raise public awareness over the stigma of borrowing against family jewels.