Role of Gold Loans in Indian Economy

Last Updated: 14 Oct 2024

India is a country essentially known for its cultural affinity towards gold, where securing gold is assumed to symbolise wealth and prosperity. Moreover, it is not only known for its ornamental value but plays a crucial role in the economy of India for its widespread gold loan utilisation. Gold loans serve as a financial lifeline for businesses and individuals, thereby contributing to various aspects of the economic landscape of the nation.

This article focuses on exploring the multifaceted role of gold in the Indian economy and its impact on the entire financial system, including the stakeholders, individual borrowers as well as small and mid-sized enterprises. Are you ready to explore more? Read thoroughly until the end!

What Is A Gold Loan?

A gold loan refers to a kind of secured loan where businesses or individuals pledge the gold ornaments they possess, which may be in form of coins or jewellery as collateral to avail funds from a Non-banking financial company or any financial institution.

In such an arrangement, the total valuation of the gold is carefully evaluated by the lender, who disburses a particular loan amount on the basis of a certain percentage of the market value of the gold. This is commonly referred to as the loan-to-value ratio. The process of obtaining gold loan typically involves the following steps:

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Step 1:

The borrower brings their gold assets for evaluation to the lender. The lender determines the purity of gold and its current market value.

Step 2:

On the basis of the prevailing loan-to-value ratio set by the lender, the loan amount is determined.

Step 3:

On finalising the loan amount, the lender disbursed the fund directly to the bank or in the form of cash.

What Are The Various Purposes For Which Gold Loans Are Used?

Gold loans are used for a plethora of purposes, like meetings immediate financial requirements, managing medical emergencies, supporting agricultural purposes in rural areas, funding educational expenses, and supporting various business activities, business expansions, consolidation of debts, wedding expenses, home renovation, travel, agricultural needs in rural areas, investment opportunities, among various other personal expenses.

The specific purpose for gold loan use may vary according to the specific and unique needs of the individual, their financial goals, as well as economic circumstances. Evaluating the terms and conditions of gold loans and seeking expert financial advice before opting for a gold loan is essential.

Gold Loan Impact On The Indian Economy

Gold loans play a significant role in determining the economy of India as it impacts several aspects of financial inclusion like rural development, entrepreneurship as well as the overall economic growth of the country.

Although being a traditional practice deep-rooted in Indian culture, it has evolved over time to transform into a crucial financial tool for thousands of Indians. Below are listed some key roles that gold loans play in the Indian economy:

Credit Accessibility:

Gold loans offer a readily accessible credit source to individuals, farmers, small businesses as well as micro-enterprises. Gold loan is easier to obtain than other forms of credit for its simple procedure.

It also proves especially helpful for those who have a limited or negligible credit history, mainly because the loan is secured against gold assets that serve as collateral. Access to immediate funds makes various small businesses sustain contributing to the overall economy of the country.

Financial Inclusion:

Gold loans play a significant role in the promotion of financial inclusion as it caters to specific segments of society that may be excluded from the formal system of banking. Especially in remote and rural areas where there exist a limited formal banking infrastructure, gold loans offered by NBFC (Non-Banking Finacial Company) and local money lenders help people with immediate access to funds and accomplish their financial needs.

Support To Medium And Small Enterprises:

The SME sector serves as a significant contributor to the economy, and for small businesses, it is a lifeline. Gold loans are often utilised by entrepreneurs to fund the requirement of working capital, operational expansion and purchase of equipment. This fosters the creation of employment as well as entrepreneurship.

Economic Growth And Consumption:

The widespread availability and convenience of gold loans can stimulate consumption and boost the economic growth of the country. By offering secured loans to individuals, it provides them with access to quick credit, which proves beneficial in various financial purchases and investments, which may include setting up a new business or planning for an expansion of an existing business.

Diversification Of Household Savings:

Indian households have long preferred the consideration of gold as a form of savings and meaningful investment. Gold loans provide them with a means to unlock the real potential of the asset without requiring them to sell it during financial emergencies. Thus it enables them to diversify their investment portfolio while at the same time retaining their holdings of gold.

Mitigation Of Seasonal Distress:

The agriculture sector of India is mostly dependent on seasonal variations and especially monsoons. Gold loans offer a lifeline for farmers in case of crop failures or low income. Therefore, it has the potential to bridge the gap and manage all their day-to-day expenses efficiently, contributing to economic stability.

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Conclusion

Thus gold loan impact on Indian economy is significant as it has become an indispensable part of the economic ecosystem in India. As a flexible and accessible source of funds, they serve a pivotal role in the promotion of financial inclusion, supporting entrepreneurship as well as boosting economic growth across the entire nation.

However, apart from all its advantages, it is essential to point out that fluctuations in the price of gold may impact the loan-to-value ratio. Therefore proper monitoring of the gold loan sector must be undertaken to ensure protection and financial stability.