Should gold loans be banned?
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In a capital-scarce economy, where access to credit is limited, though growing, gold loans look like a good option provided the ground rules are put in place. Also, since we are talking a lot about financial inclusion, this particular mode of lending is effective for a number of low-income households who buy and hoard ornaments as part of tradition.
Gold loans are typically structured as secured loans where the holder gives gold or ornaments as a security and a gets a proportion of value of the same as a loan. The interest rate varies across banks and NBFCs who finance through this mode. Also, this is a quicker process relative to other personal loans and often is considered to be more dignified as the borrower need not give references, thus revealing his monetary status to others known to them.
Prima facie, this is analogous to the pawn system that exists in unorganised markets with a transparent face. It is a win-win situation for both the lender and borrower. The lender has collateral that can be easily converted to cash and since the loan given is a fixed percentage of value, the downside risk is limited unless the price of gold falls sharply. But given that these loans are normally for a shorter tenure, such a sharp decline in value would be an exception. Therefore, for the borrower, it is a good source of finance as it eschews the elaborate processes that would otherwise be involved in personal loans.
Also, since this security is provided upfront, the borrower need not have any major worry of having other property attached as the transaction involves only the ornaments or gold that is given to the lender.
In the light of the need for financial inclusion, this is useful for both individuals as well as the SME segment, where the small entrepreneur can obtain loans easily. In the case of SMEs, very often the owner has to pledge personal effects, which is limited when gold loans are taken. Therefore, such loans should be encouraged and there is no case for banning or restricting the proliferation of these loans.
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