Indian Gold Lenders Cut Tenure, Watch Collateral as Price Falls

Photographer: David Gray/Bloomberg

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Indian firms that lend against gold are cutting tenures and seeking more collateral to protect against the plunge in prices of the precious metal.

Market leader Muthoot Finance Ltd. has been offering discounts on interest rates and other incentives to borrowers who chose to repay monthly or more frequently. Rival Muthoottu Mini Financiers Ltd. is mostly lending for 90 days now versus 270 previously, and most large firms are disbursing amounts well below regulatory limits, which was 75{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} of the metal’s value for shadow lenders and 90{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} for traditional banks through March 31.

Gold loans had boomed over the past year as small businesses tried to revive themselves from lockdowns by pledging family jewelry that’s a staple of almost all Indian households. Muthoot Finance, for instance, saw such lending increase 25{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} over the period and the company holds 146 tons of gold, higher than the official reserves of Singapore and Sweden.

“People are sentimental about their jewelery,” said George Muthoot Alexander, managing director at Muthoot Finance. “They will never want to default despite a fall in gold prices as they intend to get back their pledged ornaments.”

Gold posted its first quarterly drop in more than two years amid improving expectations for the global economy and fading demand from exchange-traded funds. The metal has fallen about 10{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} in 2021 as investors trade their havens for assets that will benefit from the economic recovery.