Gold backing loans

Gold is increasingly used to back loans in India. This is getting closer to the use of gold as a standard. More than Rs 50,000 million worth of gold is going to be used as collateral to get loans in a rapidly expanding gold loans market.

Industry estimates indicate that 200 or so tones of gold were used as collateral to raise loans over the past 12 months or so.

According to industry estimates, around 200 tonnes of gold have been used as collateral to raise loans by end November in 2011-12 fiscal.

"Gold loans help unlock value that is normally lying idle," said Siddhartha Sanyal, chief India economist, Barclays Capital.

"The organised gold loan market is just developing in India and can potentially be a source of liquidity, particularly for the middle and upper-middle class category," he added.

Citibank recently published a report that showed the organised gold loan market was worth over 100 million dollars in 2010 to 2011 and this market has been growing at over 30 percent per annum.

Gold has traditionally been used as a store of value but is a very secure asset.

"Propensity of default is also very low because the borrowers are emotionally attached to their gold," said V Sriram, CEO of IMaCS (ICRA Management Consulting Services).

The loans are very attractive for borrowers also, as the rates charged are lower than on unsecured personal loans.

The average rate of interest on loans issued against gold is 12-24% and time taken to process an application is at most 24 hours, whereas the rates on personal loans go up to 36% and processing takes much longer.

"This (organized gold loans) could further support consumption since gold is no longer considered an asset to buy and hold that is, a 'dead' asset and is now being used as collateral across income groups", said Rohini Malkani and Anushka Shah.

And what are the gold loans used for? "Gold loans are mostly raised for personal uses. For instance, in rural areas gold loans are used for agricultural purposes or to finance consumption.

At the very least it gives more value to gold in these frail economic times. India is the largest buyer of gold in the world and their demand is increasing exponentially.

Gold backing loans gives new support to the gold standard. Perhaps this will be a race between China and India.