Budget Expectations 2024: George Alexander Muthoot, MD, Muthoot Finance

23 Jan 2024 , 01:07 PM

Indian households possess up to 25,000 tonnes of gold which lies idle and can be leveraged as an immediate and reliable source of financing to meet immediate personal or business needs. Granting ‘priority sector status’  to gold loans and allowing a ‘Gold linked credit line via UPI’ can go a long way to help households/small business owners meet their financing needs and monetise idle gold jewellery.

We believe giving priority sector status to eligible gold loans will benefit the bottom of the pyramid and enhance financial inclusion. Typically small borrowers need loans under Rs 50,000 (about 20 grams of gold collateral) for short durations like a year. Herein gold loan NBFCs can play an important role to fulfill the needs of small borrowers, self-employed, micro business owners, and help address their finance needs or working capital needs. Gold loans against jewellery also is a vital funding source for MSMEs. Gold loans provided by banks to farmers do get priority sector status, but not gold loans provided by NBFCs. Extending priority status to all micro gold loans (under Rs. 50,000) by removing the current distinction between NBFCs and banks can enable gold loan NBFCs access to increased funding.

While banks offer credit line to companies like an overdraft, Banks don’t have a small credit line product for a common man which can help address monthly short term finance needs and as a result the common man either keeps huge balance in savings account, or resorts to a credit card or a personal loan to meet immediate gaps in monthly finance needs. 

We believe that a ‘gold linked credit line via UPI’ will be ideal for common man. For this extending the UPI linkage (payment system) by NBFCs is the first requirement, and once this is allowed, gold loan NBFCs can extend a credit line to common man. Unlike a credit card, this product will work like a secured credit extended by NBFCs and also attract lower interest rate (of 12%-18%) as compared to a higher interest rate (of ~36%) on a credit card.