A Friend in Need
Article By
Dr Sumitha Nandan
Executive Director, Manappuram Finance Ltd
Gold loan companies may benefit from the tightening credit cycle, higher-than-ever gold prices after the latest geo-political episode in the Middle East, and commercial lenders turning cautious in giving unsecured loans
Once again, households that are in need of cash are finding that the gold loan companies are worth their weight in gold. A peek into the economic history unequivocally reveals that lenders who provide credit against the yellow metal have always provided money to households on time and without too many hassles whenever the credit gets dearer or dries up from other sources. The recent uptick in the volume of gold loans being availed by the households once again underscores this point.
To put it in perspective, credit markets are in a fluid state after major central banks made it clear that the `higher-for-longer’ rate corridor will remain open for an extended period as they believe the inflation fight is a glass half full and there are miles to go before the current rate hiking cycle reverses its course.
The immediate trigger for concern is the grim geo-political condition in the Middle East after the October 7 Hamas attack on Israel triggering the latest cycle of despicable violence in the region. The financial markets reacted by switching to risk-off mode leading to a broad-based sell-off across the equity vertical. Also, enhanced borrowing by the US treasury department to finance the ever-growing budget deficit of the world’s largest economy has landed bond markets in a chaotic state with yield on the benchmark 10-year treasury notes climbing to 5%. To add fuel to the fire, the World Bank has warned that the oil prices may top the $150 a barrel mark if the war between Israel and Hamas “leads to a repeat of the full-scale conflict in Middle East witnessed 50 years ago”.
The cumulative effect of these developments has seen gold prices, which were on the backfoot for some time, firming up with safe haven appeal of the yellow metal swaying investors’ sentiments. Gold prices are forecast to trend well above its 200-day moving average (DMA) of $1,933 per ounce and poised to cross the 2020 and 2022 peaks of $2,070-2075 per ounce marks, according to projections by various analysts and trading houses.
Turning to the domestic economy, credit situation has never been so tight as the RBI is sure to maintain the status quo on higher rates for a longer period. It is clear from the MPC minutes that the apex bank will not think about a rate cut any time soon till the inflation returns to the 4%-mark, the upper band of its comfort zone. At the same time, supervisory division of the Reserve Bank of India has flagged the sudden spike in unsecured loans by commercial lenders sending banks into a cautious mode as they raise their guard against potential slippages in that particular segment of their loan book.
This trifecta of tightening credit cycle, higher-than-ever gold prices after the latest geo-political episode in the Middle East and commercial lenders turning cautious in giving unsecured loans may lead to households in need for money turning to gold loan companies. Since gold loans have no inherent credit risks provided lenders go through the due process of diligence, I am convinced that this segment of the credit market will gain traction and grow going forward. Also, the higher the gold prices, higher will be the business volume of the gold loan companies since they could offer higher LTV or loan-to-value for customers. To say the least, households are once again finding gold loan companies as their proverbial friend in need.
Pic Courtesy: google/ images are subject to copyright
