George Alexander Muthoot
India's economic development is primarily rooted in the resilience and growth of its Micro, Small and Medium Enterprises (MSMEs). From big cities to the remotest corners of India's hinterlands, these SMEs are driving innovation, creating over 199 million employment opportunities, and keeping the growth trajectory upward across sectors, fuelling the country's development. However, in a dynamic and unpredictable business environment, one of the major challenges faced by MSMEs is navigating unexpected emergencies and working capital needs.
Unlike multinational corporations, MSMEs rely on constant cash flows to weather crisis situations like inventory shortages, machinery breakdowns, supply chain disruptions, and sudden market trends that affect demand and supply. Moreover, the need to explore new markets, expand operations, or invest in new technologies can deplete financial reserves. Lack of timely and affordable financing keeps most MSME owners trapped in a vicious cycle of rejection from traditional lenders, forcing others to close down rather than expand.
Betting on Gold
Could gold loans be an innovative lending solution to help SMEs navigate the turbulent business environment? Despite generational shifts, Indians have demonstrated a deep-rooted fondness for gold. However, today, gold is no longer just a symbol of wealth; it is seen as a valuable asset that can fund financial emergencies and much more. Small business owners, especially those from rural and marginalized backgrounds, can leverage inherited gold as collateral to secure funds to pursue their entrepreneurial dreams and contribute to India's economic development.
Recently, the Indian Precious Metals and Jewellers Association announced that gold prices have almost tripled in nine years to hit an all-time high of Rs 73,477 per litre on April 18, 2024. This indicates that idle gold is now even more valuable as collateral. Moreover, gold loans are not a temporary solution but ensure sustainable business growth. Small and medium-sized enterprises can leverage the transformative power of gold to access larger loans, meet liquidity needs, address emergencies head-on, ensure smooth business continuity, leverage promising opportunities and scale new heights. This creates a ripple effect that creates jobs, boosts economic activity and contributes to the overall growth of the local economy.
Benefits of Gold Loan for Small Businesses
Gold loans offer numerous benefits to small and medium-sized businesses to support their long-term sustainability and success in the competitive business market. The key benefits of gold loans include:
1. Flexible Loan Amount: The loan amount available is directly proportional to the value of the gold collateral. This flexibility allows small businesses to secure loans for their specific capital requirements, be it for new machinery, expansion, employee salaries, or any other business purpose.
2. No need for external collateral: Compared to other credit options that require you to pledge external assets as collateral, there is already over 25,000 tonnes of physical gold worth $1.69 trillion sitting in Indian households and bank safe deposit boxes. This gold can be made available to small business owners to secure loans to meet their credit needs.
3. No Credit History Required: Young entrepreneurs and new business owners with low credit scores or no credit history can find it difficult to access financing easily. However, gold loans are secured by the rising value of gold, reducing the risk borne by lenders and making it easier for small businesses to raise capital.
4. Competitive interest rates: As the credit is secured by gold, these loans have lower interest rates compared to other unsecured loans, which is advantageous for small business owners as it reduces the overall operating costs.
5. Quick and easy access to funds: Unlike other unsecured loans that require extensive paperwork and lengthy approval processes, gold loans typically require minimal documentation. This reduces the administrative burden for small businesses that urgently need funds and speeds up the loan approval process without lengthy waiting periods.
6. Repayment flexibility: Gold loans typically offer a lump sum repayment option, allowing SMEs to repay the entire outstanding loan amount (including principal and interest amounts) at maturity. This allows SMEs to manage their working capital more efficiently and choose a repayment schedule that aligns with their cash flow.
7. Continuity of ownership of gold: While the gold is pledged, ownership of the jewellery remains with the borrower. Once the loan is repaid, the gold is returned to the borrower, ensuring that valuable family assets that have been passed down for generations of small business owners remain safe.
8. Reduced risk of default: Since gold loans are secured by a tangible asset that has sentimental value, it provides peace of mind to both lenders and borrowers, facilitating more stable financial transactions.
The magic of digital integration
Securing a gold loan still requires physically submitting these valuable assets for valuation, but once the gold is deposited, the integration of technology such as digital record-keeping and automated systems can speed up loan approval and disbursement. Moreover, the Reserve Bank of India has recently asked non-banking finance companies not to give loans above Rs 20,000 crore in cash, which will further encourage digital transactions. Moreover, mobile banking apps will allow SME borrowers to easily access loan details and repayment options online. This not only increases transparency but also integrates SME owners into the modern digital economy and strengthens their credit history.
These distinct advantages of gold loans, coupled with the digitisation of services, will not only provide Indian MSMEs with a solid financial base to drive innovation, but also create more jobs and promote entrepreneurship.
(The author is Managing Director, Muthoot Finance)
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