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Gold Loans Rising: Should You Hold Or Sell?

Elmira Sani

The epidemic has taken a toll on family wages during the previous 15 months, especially for lower and middle-income brackets. People appear to have turned to gold loans due to a growing cash constraint and unexpected medical expenditures. The gold loan sector for banking institutions had the excellent credit increase of all sectors for the 12 months ended May 2021, at 33.8 per cent. 

Although many consumers are trying to cash in here on their gold assets to fulfil essential needs, when can you think about taking out a gold mortgage?

How much has the gold assets increased in value?

Gold loan due with creditors has increased from Rs 46,415 crores in May 2020 to Rs 62,101 crore in the previous 12 months. RBI statistics have increased by 86.4 per cent, or Rs 33,308 crore, since March 2020, when Covid hit. Industry sources point out that only scheduled commercial banks conduct this type of activity.

Gold loans have become a key growth area for public sector banks, previously wary of them. In the Fiscal year 2020-21, the State Bank of India’s revenue increased by 465 per cent to ₹ 20,987 crores.

According to the RBI statement, mortgages authorized by banks in the form of gold jewellery and jewellery pledged for non-agricultural uses shall not exceed 75% of the gold ornaments and jewellery value. For reducing the impact on the economy of the COVID-19 epidemic on households, entrepreneurs, and small companies, the allowable loan to value ratio for loans against pledge of gold ornaments and jewellery for non-agricultural uses has been increased from 75% to 90%. This exemption will be in effect until March 31, 2021. You can search for “apply for a gold loan online” for easy access. 

Why did the gold leap?

According to industry insiders, it might be a sign of stress in rural regions, low-income groups, and micro-units. Small businesses have a lot of stress due to the lockdowns enforced by the federal government last year and state governments this year. In addition, the fall in demand has hurt many units’ cash flow and capacity to pay their staff across industries.

Pledging gold as collateral to satisfy financial obligations has long been a part of the Indian gold market. Households traditionally use gold loans to cover the costs of healthcare, school, and weddings, while small companies utilize them for capital reserves.

Is it a good idea to take out a gold loan?

Customers will benefit from the introduction of public sector banks into the gold lending market significantly. State Bank of India is giving loans at 7.5 per cent, compared to close to ten per cent paid by NBFCs.

However, low-interest rates shouldn’t be seen as motivating individuals or small businesses to take out a gold loan. According to experts, taking out a loan now might be both a good and terrible decision based on where you’re from and what you are borrowing for.

If your income is strained, taking out a loan or paying for a wedding may not be a smart option. If you seem unable to return the gold loan, the lender may sell the gold you promised.

Manappuram Finance auctioned gold worth Rs 404 crore in the quarter ending March 2021, compared to ₹ 8 crores in the preceding 1/3. Nevertheless, if somehow the mortgage is for relatively brief cash flow and also to cover an extended payment cycle, it is recommended that you take it.

Even small businessmen should not obtain a gold loan, according to banking experts, if their economic sustainability is unclear. Many small and medium-sized firms in the Covid-affected economy have lost their economic viability and cannot keep up with basic payments. Borrowing more money merely to keep paying the bills makes little sense if the firm isn’t going to survive. If the purpose is sincere, they might also want to consider filing a complaint under the IBC and starting anew.

Is it time to sell your gold?

When your cash flow has indeed been harmed and credit has become a problem, you may want to consider selling some of your gold holdings. While gold has long been seen as an asset for extraordinary times, it is important not to be sentimental about selling a portion of it to repay the debt, especially when prices have increased dramatically in the previous 15 years.

“Do not even allow emotions to get in the way. It is necessary to be logical in this regard. Don’t take a loan; instead, sell because you’ve been through an extraordinary catastrophe. When the condition improves, you can always purchase it back,” An advisor’s advice.

In reality, a portion of the funds should be used to purchase life and health insurance.

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