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Gold loans (India)

1nvest
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Gold loans (India)

#393691

Postby 1nvest » March 8th, 2021, 5:32 pm

The organised gold loan industry is estimated at about INR 3.5 trillion, or about 7% of the total size of the personal loan industry
https://www.forbes.com/advisor/in/gold/ ... gold-loan/
(Rupee is about a penny in £ terms, so the above is approximately £35Bn).

Basic concept is that gold you own is swapped for a very flexible loan repayment method, where typically you might secure a loan of up to 75% of the golds value and pay around 0.75% month in interest (near 10%/year). Where you might just pay the interest each month for a fixed period and then repay the loan at the end, or pay down the interest and loan each month, or even not pay anything until the end date when all of the interest and loan are repaid. At the end you get your gold back. Fail to repay and your credit scoring will take a hit as the default is logged (other assets such as your home may also be tied into the terms of the loan).

For those taking loans it can be a quick/easy way to raise emergency capital with very flexible terms when otherwise such loans might be slow/more costly or not even available via conventional methods (banks), or simply much more expensive (legal entities that border on being loan sharks). For those lending they have the physical gold asset as collateral that fully covers the debt - at least until the price of gold drops -25%. I guess a firm/lender with say a target £1M of gold holdings might secure that via 'lent' gold, and long/short additional gold exposure to align overall exposure to their target value. And in return might see gold +10% interest rate type benefits against the amounts of physical gold they had 'borrowed'. Great for both parties when the price of gold is rising.

£10K of gold sovereigns, used to secure a gold loan of £7500 for six months, perhaps due to a business emergency need, maybe opting to pay nothing until that 6 month date, and pay back £7843 after the 6 months to get your gold sovereigns back again. In contrast a more formal overdraft might cost multiples of that cost, and be slower/involve more complexities.

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