Indians pledge family gold amid credit crunch
AURANGABAD / MUMBAI, India (Reuters) – Denied a loan from a public lender and desperate to seek funds to buy cotton seeds before the summer planting season window closes, Indian farmer Babasaheb Mandlik ran out of choice – he pawned his wife’s gold jewelry.
Mandlik, who owns an 8-acre cotton farm in western India, pledged 70 grams of gold, almost all of his wife’s precious trinkets, in June in exchange for 150,000 rupees ($ 2,105) .
“Pawning the jewelry was a difficult decision as my wife enjoys wearing it to festivals and weddings,” Mandlik, 50, told Reuters. “I convinced her we had no other option.
Mandlik is not alone. While pledging gold has long been an option for quick funds in a country that is the world’s second largest consumer of the yellow metal, several lenders have told Reuters of unprecedented demand as people are struggling to get loans from bad debt banks and a shadow loan. industry stung by a tightening of liquidity.
The trend, which has prompted some lenders to impose restrictions as risks and borrowing costs increase, has been accelerated by record gold prices.
The Indian penchant for gold spans centuries and is rooted in the Hindu religion. Households collectively own around 25,000 tonnes of gold, which is passed from one generation to the next.
Domestic gold prices MAUc1 rose by more than a fifth this calendar year, reaching a record 38,666 rupees per 10 grams earlier this month amid a global increase.
(Chart: Indians pledge jewelry as gold prices hit record highs amid tightening credit link:)
“As many NBFCs (non-bank financial companies) have become cautious about giving unsecured or even guaranteed loans, we are seeing more and more clients opting for gold loans,” Sumit Bali said, Managing Director of IIFL Finance. “You can get a gold loan and be out of the branch in just thirty minutes.”
The IIFR’s gold loan portfolio stood at 65.83 billion rupees ($ 922 million) at the end of the June quarter, up 46% from the previous year.
Those who pledge their valuable assets are most often self-employed, including farmers and small traders.
Muthoot Finance MUTT.NS, one of the major shadow gold funding banks, said its gold lending increased 6.6% between April 1 and July 24 this year to reach Rs.358 billion.
“Pledging gold becomes more and more lucrative with rising prices. We have seen a strong demand for gold loans over the past few months, ”said George Muthoot, principal of Muthoot Fincorp, which has 2.98 million clients.
Ashutosh Khajuria, CFO of Federal Bank Ltd FED.NS, a private lender headquartered in southern India, said its gold loan portfolio was at an all-time high of around Rs 80 billion and is expected to continue growing.
India’s shadow banks began to face a liquidity shortage after the collapse late last year of Infrastructure Leasing & Financial Services, a major player in the field of non-bank financial corporations. This has resulted in increased borrowing costs, forcing NBFCs to freeze or tighten their lending practices.
Some gold lenders who are also NBFCs have not been spared, despite their growing popularity with borrowers and the strong commodity backing their loans.
Manappuram Finance MNFL.NS, which holds 2.5 million gold loan accounts, revealed last week that its cost of funds in the April-June quarter rose to 9.34% from 8.77% a year earlier.
Muthoot independently decided to reduce the maximum loan amount of 75% of the value of gold imposed by the Indian central bank to 70%, citing higher borrowing costs and the need to protect against any future volatility of the gold price.
“We are still expecting 15-20% growth in gold lending in 2019/20,” said George Muthoot.
Mandlik, meanwhile, is hoping to redeem his pledged gold, which includes coins offered to his wife by her parents, after the cotton harvest in October. But the success of his harvest – and the future of his wife’s jewelry – is at the mercy of the monsoon rains in India.
“You can sow the seeds, but the yield depends on the monsoon rains,” said Mandlik, who lost his 2018 harvest due to the drought.
(This story corrects the name of the company in the 11th paragraph).
Reporting by Nupur Anand and Rajendra Jadhav; Editing by Euan Rocha and Jane Wardell