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Social Relevance


The Scenario

Recently; there’s been a spate of financial players focusing on gold loan segment. More and more people are slowly but steadily shedding age-old inhibitions of borrowing money against their gold Jewellery. Lending money against gold has been professionalized and scaled-up in recent years by NBFCs and all the major Companies of this sector have now entered into the fray with enthusiasm and right type of competition which at large is in the interest of the customers.

It’s thus no exaggeration that gold loans are socially relevant in today’s scenario and hold so much promise for our country’s future.

Gold and Domestic Savings

It is a worldwide trend to invest a part of saving in gold to build a sense of security. In India the saving habits of the poor and rich alike are such that gold forms a major part of it. Culturally also Gold serves as an indispensable and much sought after asset to hold acting as a store of value and protecting our savings from inflationary devaluation. Not only does it act a gift, an integral part of all out ceremonial purposes but also presents as a symbol of prosperity and sophistication thus ruling the roost among all forms of domestic savings.

The Debt-Trap

Agrarian society which forms a major chunk of Indian population, faces the problem of fluctuating or unsteady incomes due to seasonal nature of their occupation. The poor frequently resort to borrowing money from the local money lender, who though obliges but at exorbitant interest rates, which makes repayment a big problem. Loans go into a cycle of defaults, landing up the borrower in a debt trap.

The Solution

If people fall back on gold and borrow money at reasonable rates of interest against the pledge of their gold ornaments, the debt-trap can be curbed to a large extent. In fact, in Indian society it is considered a sign of desperation, a stigma, so much so that when people borrow against gold, they don’t want their neighbours and relatives to know of it. The reality is that rather than use their gold to raise money, their obvious preference is to go to a money lender and borrow at sky high rates.

Why opt for gold loans?

a) No depreciation of the asset in question

* Gold loan is not subject to depreciation

* It is a liquid asset

* Transaction costs are minimal

* Lender enjoys a degree of comfort

* For a borrower facing temporary difficulties & financial requirements, the only compulsion is to keep on servicing the interest component, till his situation permits for repayment of principal amount.

b) Simple procedures and fast disbursal

* Formalities are minimal

* Procedures are simple

* Entire process should hardly take fifteen to twenty minutes

* Ideal for the micro-finance segment

c) Avoids debt trap

* Settled either by repayment or, in case of default or non-payment, by sale of the pledged security

* Cycle of non-payment and rollovers of the loan at escalating rates of interest does not happen

* In the worst case the borrower may lose his gold but there is no debt trap

d) Practically no recourse

* Gold loans are effectively given out on a “without recourse” basis

* In practice, recourse is almost never enforced

* Defaults are settled by sale of the pledged gold and losses (if any) are written off.

* No recovery agents chasing the borrower and his other properties with threats of legal action

e) Limited questioning on purpose of loan

* No hangover of credit rationing as in banking sector

* Loans advanced solely on the criterion of the value of gold pledged and questions about the purpose of the loan would only be to confirm that anti-social or wildly speculative activities are not involved

f) Monetization and gains of the economy as a whole

* Idle gold in our lockers is a liability on the Indian economy which can otherwise be lent out to industries and for infrastructure

* Impact of monetization sets in motion a whole new chain of economic activity boosting demand and consumption expenditure in the economy.

g) Moral pressure against default

* Occasional default with intention to capitalize on fluctuations in gold prices, are few as families are emotionally attached to the asset

* So from a regulator’s perspective, gold loans can actually serve to minimize systemic risks.

h) Best suited to meet the needs of the unorganized sector

* Gold loans are ideal for those employed in the informal or unorganized sector (forming more than 90% of India’s workforce) and lacking documents to prove their incomes.

Corporate Office Address
A-2, Ground Floor, Shankar Garden,
Vikas Puri, New Delhi-110018
WZ-167/G, Ground Floor, Next to
State Bank of India, Opp. Metro
Pillar No.-674, Main Najafgarh
Road, Uttam Nagar, New Delhi-110059
Phone No.: 011-45122353 / 354
Email ID:
WZ/E-7/2, 1st Floor, New Mahavir
Nagar, Main Najafgarh Road, Near
Shiv Shakti Mandir, Metro Pillar
No.-562, New Delhi-110018
Phone No.: 011-43105877 /
011-43105977, Mob.: 8744050912 / 13
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