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Gold Serving as a Lifeline for Indians During Credit Crunch

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Gold has become a lifeline for Indians in the midst of a severe credit crunch.

When the state-run lender refused to extend Babasaheb Mandlik credit, he used his wife’s gold jewelry as collateral for a loan in order to buy cotton seeds before the summer sowing season window closed.

According to Reuters, Mandlick owns a small 8-acre cotton farm in western India. He pledged 70 grams of gold in return for a 150,000 rupee loan (about $2,105). Without the gold, he wouldn’t have been able to plant this year. And that would have been a financial disaster for his family.

The country is in the midst of a credit crunch. According to Reuters, banks are grappling with bad debt and the extensive shadow-banking system in India is experiencing a liquidity crunch. This has led to the tightening of lending standards and rising borrowing costs.

The liquidity crunch followed the collapse of Infrastructure Leasing & Financial Services late last year. The company was a major player in the non-banking financial companies space. It’s troubles led to a surge in borrowing costs, forcing NBFCs (non-bank financial companies) to freeze or tighten lending practices.

“As a lot of NBFCs have become cautious of giving unsecured or even secured loans, we are seeing more customers opting for gold loans instead,” Sumit Bali, chief executive officer of IIFL Finance told Reuters. “One can obtain a gold loan and walk out of the branch in just thirty minutes.”

Muthoot Fincorp is a leading Indian gold financing shadow bank. Company officials said its gold loans rose 6.6% between April 1 and July 24 this year to 358 billion rupees.

For many Indians, gold provides liquidity that they otherwise wouldn’t have.

Indians traditionally buy and hold gold. Collectively, Indian households own an estimated 25,000 tons of gold. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system.

Gold is not just a luxury in India. Even poor people buy gold in the Asian nation. According to an ICE 360 survey last year, one in every two households in India purchased gold within the last five years. Overall, 87% of households in the country own some amount of the yellow metal. Even households at the lowest income levels in India own some gold. According to the survey, more than 75% of families in the bottom 10% had managed to buy gold.

Gold was a major source of liquidity in 2016 when the Indian government launched a demonetization scheme. In November of that year, the Indian government declared that 1,000 and 500 rupee notes would no longer be valid. They gave the public just four hours notice. The 1,000 and 500 rupee notes made up 86 % of the currency in circulation in the country. With a single pronouncement, the Indian government made virtually all of the cash in India valueless. Many Indians have thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.

Indians understand that gold tends to store value, and that in the end, gold is money. If they have gold, they know they will be able to get the goods and services they need – even in the event of an economic meltdown. And while westerners may not embrace the cultural and religious aspects of the Indian love affair with gold, the economic reasons for their devotion to the yellow metal are every bit as applicable in places like the US.

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