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Out From The Alleys, Gold Loans Gain Stature In India

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KOCHI, India — Indians own more gold than the citizens of any other country. They use the glittering metal as ornaments to flaunt family wealth, as a source of retirement savings and as insurance against calamities.

But lately, gold has become something else: collateral, and the basis of one of the country’s fastest-growing businesses, gold loans.

While pawning the family jewels would be a sign of distress in the West, trading gold for cash increasingly is viewed in India as the equivalent of taking out a home equity loan to expand a business or simply to buy things.

“This is the rural credit card,†said V. P. Nandakumar, chairman of the Manappuram Group, one of the country’s biggest gold loan companies. “This is the only way really that someone gets an instant loan within three minutes.â€

For decades, pawnbrokers and money lenders have operated in India’s back alleys, making loans against jewelry to families in distress, at interest rates of 30 percent or more. But gold loans made by banks and finance companies are different. Rates are lower — 14 to 30 percent — and their businesses are regulated.

There are no publicly available aggregate data about gold loans, but finance companies that specialize in them are growing fast. Manappuram, a pioneer in the business, made $730 million in gold loans last year — up from $397 million a year earlier.

Muthoot Finance, a privately held firm, says its lending is growing at 60 percent a year.

By contrast, total outstanding bank loans to the private sector increased 16 percent last year, year over year, and have been essentially flat so far this year.

Gold loan firms have also benefited from the financial crisis. In the last year and a half, many lenders have stopped making unsecured personal loans here because of rising defaults in India.

It is now “a lot more palatable for banks to give loans against gold jewelry,†said Viren H. Mehta, a national director at Ernst & Young India.

But loans against gold are also a measure of how immature — and restricted — India’s credit markets are.

Most Indians, especially those working in the informal economy, which accounts for 92 percent of the country’s 400 million workers, have few choices when they need to borrow money: they lack other collateral or have no documents to prove their incomes.

As a result, for borrowers like Vishwanathan C. R. Pai, a rickshaw repairman, gold loans are an essential financial tool.

Backing the loan with gold clearly is immature what you need to do is back loans against ever increasing house prices like proper mature credit markets and then get those loans bundled up together to create a triple AAA rated toxic turd you can then sell on.

Will this be our future? Gold backed loans?

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when one bank offers the first gold secured loan, northern feck up will offer a 125% gold secured loan.....believe me they will find a way to sucker everyone again, this time in six years there will be gold at £10,000 an ounce and shows on tv about how to make money from it.

better shutup cos certain people may get ideas!!!!!

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This is how majority of money market works in the east. I think the time is nigh for the same thing in the west ( or waste- as I now call it)

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