Corona virus: why Indians resort to investing in gold with an outbreak


10:05 am

Sunday 02 August 2020

New Delhi – (BBC):

The Indians are returning to one of their oldest assets, amid a pandemic preceded by a banking crisis, according to the BBC’s Nidhi Ray.

And to say that the Indians love gold will be less descriptive than reality. Over the centuries, families and temples have hoarded this precious metal.

According to estimates by the World Gold Council last year, the total gold reserves throughout Indian homes amounted to about 25 thousand tons, which is the largest in any country in the world.

This secured investment, tested over time, has regained its popularity as the Indian economy moves to free itself from the devastating effects of a global pandemic. When Covid-19 was hit, the $ 2.5 trillion Indian economy was already faltering due to a banking crisis.

One of the results was a liquidity crisis, which prompted many Indians to convert to gold as an investment and trust

Konal Shah, a commodity market expert, says they are increasingly using it to raise funds.

While traditional bank loans are difficult to obtain, high gold prices have helped to increase the popularity of these loans.

Gold prices have risen by 28 percent this year to over 50,000 rupees ($ 668) per 10 grams.

The jump in value is due to several reasons. First, Western banks print currency and buy gold on the international market as a long-term guarantee. Second, stock markets around the world are volatile, which motivates people to invest in gold, which pushes its price up. With negative interest rates in many countries, it is not profitable to keep money in banks.

All this affected the price of gold, as experts say it is expected to increase in value in the coming months.

Desha Dinesh Parap, from the western city of Pune, was among those who relied on what is known as gold loans (i.e. mortgaging their gold jewelry in exchange for a loan) to keep their business during the epidemic. Over the past ten years, it has been making and selling about 40 to 50 boxes of food a day.

But in recent months, due to low demand in a partially open economy, she had to cut prices from 1 to 80 cents per lunch fund and was unable to sell a quarter of what she used to.

She says the gold loan was “the quickest and cheapest option available.”

Parap pawned 6 pieces of gold jewelry to obtain a loan from a local cooperative bank for $ 3340. It pays interest of 9.15 percent annually for a period of three years. If she opted for a personal loan, she would have to pay a higher interest rate, just over 11 percent, for the same period.

Farmers also view gold loans as an incentive. Hosellal Malvia, a farmer in the western state of Maharashtra, borrowed more than $ 5,000 in gold to start working on his farms.

“We tried to get a loan from the banks but they asked a lot of questions and they were hesitating, but the local cooperative bank was ready to help with a gold loan,” he says.

Both gold and personal loans allow the borrower to use the money however they want. But for many, gold loans are the easiest to obtain because they require fewer documents, often gold is readily available with the home as assets, and gold loans are currently worth higher because of the high price of gold.

Low interest rates on gold loans are an additional advantage now, and interest rates start at just over 7 percent and rise to 29 percent, depending on options of possession and payment. By comparison, interest on personal loans ranges between 8 percent and 26 percent annually.

Gold loans are set to grow at a much faster rate compared to personal loans. “We expect to grow by 10 to 15 percent this year,” says VP Nandakumar, CEO of Manapuram Finance, a non-bank financing company specializing in gold lending.

It has also become easy to get gold loans now as regular commercial banks tightened their procedures as a history of bad lending decisions left Indian banks with one of the highest rates of bad loans in the world. The epidemic has made matters worse, leaving banks worried that more and more borrowers may falter. The result was that the banks were no longer lending as much as they used to.

In 2019, Indian banks agreed to 6 percent more loans than the previous year, according to the local rating agency, Kreecel, and it is expected that banks this year will offer just 1 percent more loans than usual. Historically, loans have been growing by two numbers.

“Small companies come to us because bank loans take time. They need short-term working capital as the closure has frozen all financial flows,” says George Alexander Muthot, managing director of Muthot Finance, one of India’s largest golden loan companies.

Even ordinary banks that specialize in gold loans reap interest. The Federal Bank and the Indian Bank have seen a 10-fold increase in demand for gold loans, mainly in small cities and towns.

Experts expect that gold loans will continue to rise with the rise in prices. Before the closing last March, the price of gold reached $ 38 per gram, and at the present time it is about $ 44 per gram. So the gold loan will now bring about $ 7 per gram more than he did last March.

“The high gold prices make both the borrower and the lender happy,” says Somasundaram PR, Managing Director of India at the World Gold Council.


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