EDITOR NOTE: As Americans, we know that credit rating agencies attempt to “quantify” our capacity to pay back loans. It's all about “confidence.” In India, where COVID-19 has decimated much of their economy, making banks reluctant to extend credit to many individuals, businesses, and even farmers, they’ve found another solution: gold. Gold is such a part of the Indian culture that even the poorer segments of Indian society stash it. If Indian banks can’t make loans based on “confidence,” will they lend with gold as collateral? Heck yes. Unlike most citizens in other countries, India recognizes an important monetary truth--that gold is money.
The government response to the coronavirus pandemic has ravaged the Indian economy. As a result, many banks are reluctant to extend credit due to fear of defaults. In this tight lending environment, many Indians are using their stashes of gold to secure loans.
For instance, Umesh Patil used 40 grams of gold toe raise 130,000 rupees ($1,723.11) in order to purchase seed and supplies to plant his next crop. He told Reuters it was next to impossible for him to secure a loan from a big bank.
State-run banks were seeking lots of documents for crop loans and furnishing them all wasn’t possible quickly. So I decided to pawn jewelry. I got a loan from a local co-operative bank in just an hour.”
According to Reuters, loan growth in India is decelerating rapidly, and analysts project it will hit a multi-decade low of 0 to 1% in the current financial year due to fallout from the pandemic. Somasundaram P.R., head of the World Gold Council’s Indian operations, said gold will continue to serve as a vital lifeline as credit shrinks.
As banks could exhibit greater risk aversion in the current context, gold loans would be a convenient route for many customers to raise liquidity and working capital.”
For many Indians, holding 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 in 2018, 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 also 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.
Originally posted on ZeroHedge