In India, gold loans gain popularity as precious metal's prices soar

About 90 percent of the gold in India is owned by individuals, said an official at HDFC Bank. Gold jewelry is culturally important in India.
About 90 percent of the gold in India is owned by individuals, said an official at HDFC Bank. Gold jewelry is culturally important in India. (Rama Lakshmi/the Washington Post)
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By Rama Lakshmi
washington post foreign service
Tuesday, January 12, 2010

NEW DELHI -- With time running out, Praveen Garg scrambled to find the $6,000 he still needed to buy a fancy, five-bedroom apartment with a park view. But his relatives and friends refused him, and the bank turned him down for an emergency loan because he did not have the proper tax documents for his small shoe business.

Left with no other options, he did the unthinkable: He pawned his wife's gold jewelry and his mother's, an act many Indians consider a disgraceful sign of desperation.

"It was a very difficult decision. I had to swallow my pride like a bitter pill," Garg said as he opened a red velvet jewelry box and handed his wife's wedding bangles, necklace and earrings to a gold loan executive at a bank in New Delhi. "If people in my neighborhood find out, they will ridicule us."

Though seeking a gold loan was culturally bold, Garg said it was more private than going to a neighborhood moneylender.

Nearly every middle-class Indian family owns gold jewelry, which is central to weddings and rituals, and few traditionally have been willing to part with it to secure loans. But with gold prices soaring, banks have begun to push customers toward gold loans. The transactions have become even more popular as small personal lending dries up because of rising defaults on risky loans.

"India is one of the largest consumers of gold in the world, and about 90 percent of the gold in India lies with individuals and not in banks," said Biju Pillai, executive vice president of HDFC Bank, which has the largest share of gold loans among Indian banks. "But the paradox is that gold is the least leveraged product for loans. We want gold to come out of the closet." The bank's gold loan business grew 55 percent last year, he said.

The market is huge, but so is the cultural barrier.

Over the years, many melodramatic Bollywood movies have reinforced the stigma, portraying the sale of gold as a sign of a man's inability to earn a living. The taboo is so deep-seated that Indians were shocked to shame in 1991 when the government pledged its gold deposits abroad to borrow money during a crunch.

Through a string of television, radio and print advertisements in the past few months, banks and finance companies aggressively are pushing Indians to shed their inhibitions. Many advertisements show women initiating the decision.

In one commercial, when a sari-clad woman gently suggests pawning her gold jewelry to upgrade the family store, her husband leaves the dinner table in a huff, mouthing a cultural cliche: "I am not in such a bad way that I have to pawn off my wife's jewelry."

"Through our campaign, we want to bring a revolution in the age-old Indian mind-set about family gold jewelry," said Avinav Chaubey, marketing head of Muthoot Finance, a family-owned firm expanding across India, with 400 branches planned in the next two years. "Every Indian family buys gold jewelry, but only 10 percent of it is worn regularly. The rest of it sits idle, locked up in bank safes. It is an unproductive way of keeping such a high-value asset."

As gold prices have risen during the global economic slump, middle-class Indians have returned to their age-old preference for gold as a safe investment after flirting briefly with stock markets and mutual funds.

Bankers say the default rate is much lower for gold loans because Indians do not want to risk losing their family jewelry. And unlike traditional personal loans, no credit checks are needed for gold loans.

"Getting a gold loan is about 4 to 6 percent cheaper than procuring regular bank loans. We take five minutes, but a regular loan takes several weeks of paperwork," said K.R. Bijimon, chief general manager of Muthoot Finance.

The banks now want to convince young Indians that pledging gold is a smart decision and not just a last resort.

Ranvijay Singh, a 35-year-old trader, stood at a Muthoot Finance counter with three of his wife's intricately carved gold bangles for a $2,000 loan.

"My wife is an equal partner in my life; she offered her bangles to me," he said. "She said this is more honorable than borrowing money from friends and relatives."

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