Why Are Gold Loan Tenures Increasing During Covid ?

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Gold is a preferred saving for Indian households as it provides capital preservation, liquidity, and a source of funding during bad economic times, supporting the importance of gold as a strategic asset in the country. It is a tradition in India for individuals to store gold in their homes. Gold is a prominent feature in India’s investment field, and because of the covid-19 impact, the demand for gold loans has risen significantly. There has been an immense demand from borrowers for gold loans from banks and financial institutions. Organized gold loan is expected to grow 55.2 billion dollars in 20-21 from 47 billion dollars in 19-20. Gold loans are helping individuals to manage their finances and expenses during the covid-19 pandemic. An increase in the price of gold during the pandemic has also increased demand for gold loans as it leads to a higher loan to value ratio being offered by banks and financial institutions.

 

Gold loans have been a pillar to small and medium-sized businesses, and households during emergencies. With the pandemic situation, there has been a trend in the increase in gold loan demand from individuals and companies. This was due to the lack of availability of other loan options because banks and financial institutions were focusing on mitigating their risk after the lockdown. Therefore, gold loans are being recognized as a source of long-term funds and immediate liquidity to these individuals and business owners. Generally, banks and financial institutions provide a tenure ranging from 12-24 months on gold loans; however, to comply with the immense demand for gold loans, banks and financial institutions have increased the gold loan tenure during covid. This is because borrowers can use their existing assets to obtain immediate cash and obtain this asset back once the loan is repaid. This is a safe option for borrowers as well as lenders. Borrowers plan to meet their long-term expenses with the amount issued through the gold loans; therefore banks and financial institutions have increased the tenure of gold loans. Some banks and financial institutions are offering flexibility to the borrowers to extend the tenure of gold loans for an unspecified period. There is no limitation on the number of times the borrower can roll over the loan. However, the borrower should settle the interest in full during the rollover. If the price of gold decreases during the rollover, the borrower may have to enlist additional collateral or pay the margin in cash to the bank or the financial institution. If the price of gold increases, it’s beneficial for the borrower as they can obtain a higher amount on the gold loan.

 

Reasons why a gold loan is a common option amongst borrowers :

Low-interest rate:-

The Gold Loan Interest Rate is lower than the interest charged by banks and financial institutions on other loans. This feature makes it an advantageous option amongst borrowers.


No processing fee :-

Banks and financial institutions do not charge processing fees on gold loans or it can be as little as 1% of the gold loan amount. Generally, the processing fee has to be paid upfront by the borrower, so this advantage of a gold loan helps the borrower to save money.


No processing fee :- 

Generally, banks and financial institutions impose a lock-in period and charge a penalty on the prepayment of loans. However, in gold loans, there are no restrictions and prepayment fees charged by the bank or financial institutions.


Easy availability :-

Banks and financial institutions such as IIFL Gold Loan offer gold loans to borrowers on simple terms. The simple criteria, the requirement of minimum documents, quick processing time make gold loans a common option amongst borrowers. Gold loans are simple and easy to obtain. The borrower should assess their financial situation before obtaining a loan to avoid facing any unfortunate consequences.

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