Gold-backed loans rise in India as price of precious metal surges to record highs

Banks are also tapping into the massive lending opportunity, offering their customers loans against jewellery

Gold jewellery are displayed at a shop in Dubai Gold Souk in the Gulf emirate on July 29, 2020.  / AFP / GIUSEPPE CACACE
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Gold loans company Manappuram Finance is seeing a steady rise in the number of people, mostly poor, borrowing money against their gold jewellery. The record surge in gold prices has given them an opportunity to get their hands on some extra cash to make both ends meet during the Covid-19 pandemic.

“Most of our customers belong to the poorer sections [of the society],” says VP Nandakumar, managing director and chief executive of the company based in South Indian state of Kerala. “A loan against gold jewellery is perhaps the most convenient option available to them for quick and easy access to credit. These are small shopkeepers, farmers, labourers, small and medium household businesses.”

Many of them “lack documents to prove regular income and therefore are unable to access formal credit from the banking system”, he says.

With the rise in borrowings, the company expects its gold-backed loan portfolio to see a 10 to 15 per cent year-on-year expansion at the end of the current financial year.

Gold has long been an alternative means of storing wealth – particularly for those who do not have access to traditional banking services. Millions are struggling to find work in Asia's third-largest economy in the wake of the pandemic-induced lockdown that came into effect in March. Borrowing cash against gold to meet daily expenses seems like the most logical option for the unemployed.

It helps that gold prices have been hitting record highs, surging more than 30 per cent this year to over $2,000 (Dh7,345) per ounce last week. Investors globally are piling into bullion, a haven asset amid weaker global economic outlook and lower interest rates and a consistent slide in the US dollar.

Although India has seen a rise in gold-backed borrowing in recent months, the pandemic and the slumping economy have dampened appetite for the precious metal. Goldman Sachs estimates the Indian economy will contract 5 per cent in the current financial year.

The World Gold Council's latest report reveals that demand for gold in India in the second quarter of this year fell 70 per cent to 63.7 tonnes compared to the same period last year. Demand for gold jewellery – which makes up the bulk of India's gold consumption - dropped 74 per cent to 44 tonnes in the quarter to June.

“India [is] still in the throes of the effects of Covid-19 ... [and that] has affected gold demand in the country,” says Siddharth Panjwani, the chief strategy officer at Pickright Technologies, a FinTech marketplace platform in Bangalore. “This is amidst the backdrop of record gold prices. The economic situation, along with the propensity to hold on to cash savings with uncertain future incomes has led to a precipitous fall in the demand of gold in India.”

Gold holds enormous cultural and traditional significance in India. It is considered an essential part of Indian weddings, partly because it is believed to be auspicious. But this year, many weddings have had to be postponed or dramatically scaled down in the country due to lockdowns.

“The wedding season and hence jewellery demand is also affected,” says Mr Panjwani.

India is one of the world's largest markets for gold but a demand turnaround in the short term is unlikely, analysts say.

“I'm doubtful that people would absolutely rush to buy jewellery,” says Somasundaram PR, managing director, India, for the World Gold Council. “It is about confidence, and we have seen a huge increase in prices. People will wait and see at these prices whether it is going to be volatile or whether it is going to go up further.”

Gold loans, however, could increase, Mr Somasundaram says, as Indian banks are now also pursuing “an aggressive strategy” to compete with gold loan companies such as Manappuram Finance and Muthoot Finance, as well as independent pawnbrokers and money lenders.

"The growth came mostly from existing customers who made use of our digital channels to increase their borrowings against their existing pledge," VP Nandakumar, managing director and chief executive of Manappuram Finance, says.

However, declining disposable incomes have kept Indians away from gold investment and consumption, says Sugandha Sachdeva, the vice president, metals, energy and currency research at Religare Broking, in New Delhi.

“High volatility at these levels is another concern for investors,” she says.

The impact on earnings of jewellers is all too visible.

Ketan Chokshi, one of the founders of Narayan Jewellers, says that demand for gold jewellery is just about 30 per cent of what it was before the coronavirus pandemic.

"People are not looking at jewellery right now", as the finished product includes making charges on top of the high gold prices. They are more interested in gold bars or a coin, expecting prices to rise further.

Mr Chokshi says that given Indians' love of gold, “demand [for gold jewellery] will come back” eventually, “but not until the pandemic situation eases”.

“Gold is a tradition of Indian culture,” he says. Although Indians will take loans against it, they are less likely to sell their gold jewellery due to cultural or sentimental value attached to it, he adds.

Mr Somasundaram says that “what is going to happen in the second half is very, very difficult to predict”, given the infection rate is still on the rise and and the government could double down on virus containment measures.

The number of confirmed coronavirus in India – the third worst-affected country globally – has exceeded 2 million.

Mr Somasundaram however, says there is a “latent demand” for gold and “India could surprise”, but it would largely depend on what happens with the pandemic.

Bloomberg News earlier reported that India's demand for gold rebounded last month with easing of lockdown restrictions. Citing a person familiar with the data, it said that imports rose by a quarter to 25.5 tonnes in July.

With major festivals including Diwali coming up later this year, which are traditionally times when Indians buy gold, analysts say that there could be slightly more buying in the months ahead.

“Demand is likely to pick up gradually around festival and wedding season in the third and fourth quarter,” says Ms Sachdeva.

Despite the decline in overall gold buying in India, there has been a bright spot: gold exchange traded funds, or ETFs.

The World Gold Council says that ETFs grew “after being dormant for many years”, while “digital gold too saw significant activity though volumes are yet negligible in the overall demand scenario”, with lockdown restrictions pushing investors towards buying online over physical purchases.

Data from the Association of Mutual Funds in India reveal that gold ETFs in the country saw an inflow of 35bn rupees ($466m) in the first half of the year.

Palka Chopra, senior vice president at Master Capital Services, says that there are factors that make gold potentially attractive as an investment.

“At present, the interest rates are low and are expected to go down further,” she says. “Spending and the borrowing of the central government creates a lot of risk which can improve the demand for gold. It's expected that inflation is on the way, which traditionally will stimulate the demand for gold.”

Meanwhile, businesses that have spotted the opportunity in the gold market trends were quick to adapt.

Mr Nandakumar at Manappuram Finance says that in the quarter to June, footfall at its branches for gold-backed loans in India were low due to lockdowns and as people were reluctant to venture out.

“The growth came mostly from existing customers who made use of our digital channels to increase their borrowings against their existing pledge,” he says.

Manappuram is looking to come up with new ways to boost business during the pandemic. It has already launched a "doorstep delivery" service.

“Our executives visit the customers at the residence to collect the jewellery, appraise it on the spot, and disburse the loan amount directly to the bank account,” says Mr Nandakumar.

With coronavirus cases continuing to rise in India, and lockdowns still in place, the company is banking on people turning to gold as collateral to ease their cash crunch.