India has recently seen a boost in gold and unsecured loans offered by NBFCs and banks. What does this mean for the economy? Let’s find out!
On 27th December, the Reserve Bank of India published a report which said, ‘Indian banks have displayed a ‘herding behaviour’ diverting lending away from the industrial sector towards retail loans’.
Simply put, retail lending has increased. And why not? Because lending was cheaper in India until recently. Nowadays, every individual uses a credit card and purchases products using ‘Buy Now, Pay Later’ schemes. Moreover, banks are busy wooing customers to grab an instant personal loan within five minutes without any paperwork! Because of such a framework, people are getting dependent on taking loans to finance even their slightest want.
Moreover, if you think that home loans are the bestselling type of loan that banks offer, then you are incorrect. The bestselling loans are gold loans and unsecured loans.
Reason Behind Taking Excessive Credit
A decade back, interest rates were high and retail individuals used to take only a few types of loans like home, gold, car, etc. Credit cards were not in trend back then. When the interest rates softened, banks and NBFCs started focusing on attracting retail customers to take a loan.
Cut to this day, where the age-old home loans are left back, consumer durables and the credit card have taken over the retail loan segment.
Gold Loan Outshines Everyone Else!
Post-pandemic, gold loans have seen a tremendous jump and have outshined everyone else. As we know, gold is an asset which can be easily liquidated at times of need. After the pandemic, retail individuals who needed money to meet ends opted for a gold loan.
According to Economic Times, between October 2019 and October 2022, gold loans in India grew by a whopping 194%!
Companies like Muthoot Finance and Manappuram Finance have expanded their gold loan business to a great extent in recent years.
Is India Walking Towards Being a Credit-Driven Economy?
If we were to see a clear picture, in 2021, the nation was going through the phase of a pandemic wherein, due to job loss, individuals borrowed money to sustain themselves during hard times.
The year 2022 was when the economy revived; hence, we saw a rise in lending numbers breaching pre-pandemic levels. Secondly, India’s debt-to-GDP ratio is in line with its emerging peers like China, South Korea and Russia. So, it is safe to say that we are within sustainable levels.
*Stocks and sectors mentioned in the article are for informational purposes. This is not investment advice.
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