Over the last few years, gold loans have surged in India with the promise of being a vehicle for anyone in need of quick cash. With gold having jumped nearly 60% between 2018 and 2023, it has indeed become much easier for people to use their gold assets as collateral. Though gold loans are a lifesaver in a crisis, they do come with lurking perils of outrageous interest rates and loss of ancestral heirlooms. Let’s dig deeper into the less-visible concerns of the booming gold loan market in India.
Rising Demand Among Vulnerable Borrowers
Gold loans are in high demand among middle-income and low-income households. For example, close to 70% of all gold loan customers fall in this category as most of them tend to take up these loans as their only source of credit. Leading gold loan companies such as Muthoot Finance and Manappuram Finance clocked high growth rates of 20-30% in their loan books during the pandemic years, largely on account of the COVID-19 crisis.
However, this rising demand has also led to an enormous increase in small-ticket loans among economically vulnerable groups. Since gold is often the last asset of a family, borrowers seek such loans with all that a person can do to preserve his savings for the future as well.
High interest and fees keep on trapping them
In reality, gold loans may seem to be a relatively expensive proposition, even though they are secured with collateral. Average interest rates charged range between 10% and 24% annually. Non-banking financial companies that dominate the gold loan market often add several hidden processing fees, renewal charges, and other penalties that increase the true cost of borrowing.
Data show that more than 50% of the borrowers renew or roll over their gold loans as they cannot pay back the loan within the very short tenure, typically ranging between 3 and 12 months. These rollovers can become debt traps where the borrower is charged interest continuously without repaying the principal amount at all.
Emotional Cost of Default: Losing Family Heirloom
More often than not, the gold jewelry carries much more than an economic value for most Indians. It is also passed on through generations. Defaults on a gold loan often result in the loss of such precious pieces of family heirloom treasures. A gold borrower who fails to make the repayment is considered an opportunity by NBFCs and banks to auction off the pledged gold at prices below market value merely to recover costs quickly.
A new report indicated the number of gold auctions surged 32% in 2021 as families ran from repaying loans during the pandemic. In addition to the overwhelming financial loss, the mental tragedy of losing family heirlooms was at a considerably psychological stress level with the outright monetary burden.
Aggressive Marketing and Hidden Risks
NBFCs and banks generally market the gold loans as quick, ready-to-use cash for the cash-starved individuals, claiming the highest loan-to-value ratios of 75% of the market value of gold. In other words, a borrower is easily tempted to take a higher amount of loan than he can service later. According to reports, lenders aggressively market gold loans in rural and semi-urban areas where literacy on financial matters may be poor, hence uninformed borrowing.
Also, while regulated institutions are subjected to RBI rules, unregulated local lenders expanded their operations to most regions, especially in the rural economies. The informal lenders usually impose very high rates of interest, which heightens the possibilities of financial stress on the part of the lenders. Scarce Protection of Consumers in the Gold Loan Market
While there is an expectation that lenders should adhere to guidelines set forth by RBI, the Indian gold loan market is certainly slack when it comes to putting in place concrete policies regarding consumer protection for consumers. Unlike other credit products, gold loans come without the same requirement for transparency and therefore costs are hidden from consumers. Consumers also have little knowledge of the penalty charges when consumers default. Gold can be publicly auctioned as one form of penalty imposed upon the borrower.
Recommendations for improvement come with suggestions that the investments in the education of financial literacy of the borrowers and in regulation that provides fair practice should be intensified. Investments along these lines can help save families from long-term debt or valuable family assets lost in quick fixes turned out to be long-term burdens.
A Double-Edged Sword for Borrowers
While gold loans provide an easy money solution, the negative consequences are considerable, especially for poor families. The very high interest rates, possibility of losing family jewelry, and lack of consumer protection render gold loans a double-edged sword. The rising demand for gold loans demands greater transparency, responsible marketing, and financial education for the protection of vulnerable borrowers.
This also cannot be considered: obtaining a loan for gold, knowing their risks, and comparing interest rates to at least have some form of some repayment strategy in place.
