Farmers in India Get Cheap Loans Against Gold

MUMBAI  - Farmers in India have a new trick up their sleeve, especially those in the southern states of India. Many farmers have found to their amazement that banks are ready to extend loans to the farmer if they tender gold jewellery as collateral. Though the custom is an old and tried one and harboured for several years by local money lenders and non banking financial institutions in smaller villages, what has now got farmers flocking to the nearby bank is the low rate of interest.

“Most farmers have woken up to the fact that they can get a loan, using gold as security, for a low interest rate of just 4%. Farmers currently pay 7% on crop loan. There is an interest subvention clause that most farmers are drawing on these days, ostensibly under the category of farm loan.,” said Chaitanya Shellar of Sonamull Traders, a bullion investment firm.

Several years ago, India’s central bank the Reserve Bank of India asked its member banks to introduce short-term farm loans at an interest outgo of 7%. The idea was to encourage farmers to build on the agricultural acerage.

In 2009, Finance minister Pranab Mukherjee in his budget speech announced that the government would pay additional subsidy of 1%, as an incentive to those farmers who repaid their short-term crop loans on schedule. The interest rate for these farmers then had come down to 6%.

This year, in his budget speech, Pranab Mukherjee announced that those farmers who repaid their dues in time would get an interest subsidy of 3%. This has effectively brought down the interest rate of crop loans to 4%.

“Several public and private sector banks are intent on doubling their gold-backed loan portfolio, by extending their lending activity to small and marginal farmers. Some schemes enable the farmers to access loans backed by ornamental gold for a maximum tenure of two years, following which the gold assets of the customer can be rolled over,” said a banking official.

Added another official of Andhra Bank: “These types of loans are beneficial to the customers, who can unlock the value of the gold. And to us, too, because gold always appreciates in value.”

The banking officials pointed out that the interest earnings from farm-lending against gold was modest. Against this, loans against gold to non-farm retail segment are considered to have higher return rates and are associated with less risk of turning into Non-Performing Assets.

Risk averse

It is not a recent phenomenon. Players in the gold loan business have been regularly urging poor families in India to leverage their gold holdings instead of keeping their valuables idle. Analysts insist that the sizeable spread that the company can earn and the low non-performing loans make the business lucrative.

Rather than rely on the local pawn broker or money lender, banks are enticing farmers to a highly secure and trusted lending institution. “Even affluent farmers have a means of accessing short-term cash on personal valuables. Many farmers with significant amounts of gold have a new way to access emergency cash,” said a banker.

The main institutions to provide credit are the state cooperative banks, central cooperative banks, primary agricultural credit societies, land development banks and scheduled commercial banks including regional rural banks.

This has ensured that poor farmers in the remotest corner of India can access farm loans. And can hawk old items of gold as security.

“Many farmers are now using their household gold jewellery as collateral,” confirmed Venugopal Shastri, bullion analyst with a foreign brokerage house. He added that for the bank, shelling out a loan against gold was practically risk-free since banks ensure a significant margin between the loan amount and the value of gold.

Bankers said that most households in the southern states of India have at least some gold holdings, and have been regularly indulging in refinancing of loans against gold. While the banks provide short to medium term loans to farmers, some are even open to converting short-term loans into medium-term ones, when there are problems of recovery due to crop failures or natural calamities.

“Gold, gems and jewellery are allowed as collateral, so the banks can loan more money. Loans allow people to start or expand their businesses, which expands the economy and creates more jobs,” said bullion analyst Ashwin Thanedar.

He added that allowing gold to be used as collateral made sense because many people already buy gold as their savings, preferring it to hard currency or bank savings.

“Since farmers can put their gold down as collateral to obtain loans, they would not need to borrow from local money lenders or pawn shops that charge outrageously high interest. Even J P Morgan Chase allows some of its clients to use the precious metal as collateral,” said another banker, adding that gold was re-establishing its role as a monetary and financial asset in this way.

In the international market, gold rose for the second consecutive day on Thursday, nearing a one-month high, with reports indicating that output in the manufacturing sector in the US hit its lowest level since 2009. Spot gold rose to $1,542.89 an ounce.

In India, at the Multi Commodity Exchange, gold for delivery in August declined by 0.25%, with a business turnover of 1,096 lots. The metal for June delivery lost 0.20% with a business volume of 113 lots.

More competition

Analysts maintain that the gold loans market in India is set to witness more competition with financial institutions and banks entering the lucrative business. Kerala-based Federal Bank is to widen its network of exclusive gold loan branches in various parts of the country. It already has 60 branches in Tamilnadu and Karnataka and is planning to increase its gold loan branches to 350 by the end of the year, said Shyam Srinivasan, managing director of Federal Bank.

Bankers point out that the default rate is much lower for gold loans because Indians do not want to risk losing their family jewellery.

Trading gold for immediate cash is viewed in India as the equivalent of taking out a home equity loan to expand a business or simply to buy more farm machinery. Earlier, local money lenders offered loans against jewellery at interest rates of 30% or more. Gold loans by banks are vastly different, interest rates are lower and the business is regulated.

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