Gold loans, often considered the final recourse during financial emergencies, possess significant potential to unlock liquidity at the grassroots level while instilling sound financial discipline. According to the World Gold Council, Indian households collectively possess approximately 25,000 tonnes of gold, solidifying their status as the world’s largest holders of this precious metal.
Elevating gold loans to priority sector lending could integrate this substantial gold wealth into the formal financial sector, addressing the challenges posed by the currently limited credit supply in rural India.
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In response to the persistent request to designate them under the priority sector, it is crucial that small-scale gold loans, amounting to Rs 50,000, and permitting a loan-to-value (LTV) ratio surpassing 75%, be equated with microfinance lending. This parity is essential for fortifying financial inclusion.
Additional measures for concessional credit within this sector can unearth the vast potential of dormant gold reserves, especially in rural India, where the credit supply is alarmingly low at 8%.
Unlocking Liquidity at the Bottom of the Pyramid:
Gold loans have emerged as a reliable financial safety net during times of crisis, offering individuals a means to access immediate funds. By recognising their significance in mitigating financial emergencies, Budget 2024 can seek to unlock the vast potential lying dormant at the bottom of the economic pyramid. The move towards categorising gold loans under the priority sector can boost a commitment to extending financial services to those who need it the most.
Parallels with Microfinance Lending:
Drawing parallels between gold loans and microfinance lending, the proposal advocates treating small gold loans (up to Rs 50,000) with an LTV exceeding 75% on par with microfinance lending. This strategic alignment is not just symbolic but holds the promise of fostering greater financial inclusion.
Microfinance institutions have long been at the forefront of reaching the underserved, and extending similar considerations to gold loans can amplify the impact, channeling credit where it is needed the most.
Concessional Credit Measures:
Recognising the critical role gold loans can play in the broader financial landscape, Budget 2024 can consider additional measures for concessional credit in this segment. This forward-looking approach aims to tap into the hidden potential of the vast gold reserves scattered across rural India. By providing financial institutions with the necessary incentives and flexibility, the budget will help to bridge the credit gap that has hindered rural development for too long.
Addressing the Rural Credit Gap:
The assertion that credit supply in rural India stands at a meager 8% underscores the urgency for transformative measures. Budget 2024 can help position gold loans as a strategic lever to address this imbalance. By encouraging financial institutions to extend credit with more favorable terms, the budget can seek to ensure that rural communities have access to the financial resources required for sustainable growth and development.
Budget 2024’s recognition of gold loans as a potent force in the financial inclusion narrative signifies a pivotal moment in India’s economic strategy. Aligning small gold loans with microfinance lending and introducing concessional credit measures, can set a stage for unlocking the latent economic potential in rural India. As the nation moves forward, the integration of gold loans into the priority sector can mark a step toward building a more inclusive and resilient financial ecosystem.
-The author is Founder-Radian Finserv. Views expressed are personal.
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