George Alexander Muthoot
India’s economic progress is majorly rooted in the resilience and growth of its Micro, Small, and Medium enterprises (MSMEs). From metropolitan cities to the remotest corners of India’s hinterlands, these small businesses are driving innovation, generating more than 199 million job opportunities, and continuing an upward growth trajectory across sectors to fuel the country’s development. However, in the dynamic and often unpredictable business environment, one of the significant challenges that MSMEs face is navigating through unforeseen emergencies and working capital needs.
Unlike multinationals, small businesses rely on constant cash flow to manage critical situations such as lack of inventory, machinery breakdowns, supply chain disruptions, and sudden market movements impacting demand and supply. Moreover, the need to explore new markets, expand business operations, or invest in newer technologies may drain their financial reserves. Hindered by the lack of timely and affordable financing, most MSME owners end up being trapped in the vicious cycle of rejection from traditional lenders, while others are forced to shut down, let alone expand their business.
Banking on gold
Can gold loan become an innovative credit solution to empower MSMEs to sail through turbulent business environments? Despite generational shifts, Indians have shown an enduring inclination towards the yellow metal. However, gold is not merely a symbol of wealth today, it is seen as a valuable asset which can fund more than just financial emergencies. Small business owners, particularly those from rural areas or marginalized backgrounds, can leverage their inherited gold as collateral to secure funds to pursue their entrepreneurial dreams and contribute to India’s economic development.
Recently, the India Bullion and Jewellers Association said that gold prices have nearly tripled in nine years and reached an all-time high of ₹73,477 on April 18, 2024. This is evidence of how idle gold is worth even more as a collateral now. Plus, gold loans are not a temporary fix; they ensure sustainable business growth. MSMEs can leverage the transformative power of gold to avail bigger loans and fuel their liquidity needs to address emergencies head-on, ensure smooth business continuity, capitalize on promising opportunities, and propel towards new heights. This creates a ripple effect that fosters employment generation, economic activity, and contributes to the overall growth of regional economies.
Advantages of gold loans for MSMEs
Gold loans offer numerous benefits to MSMEs to support long-term sustainability and success in a competitive business market. A few key advantages of gold loans are:
1. Flexible loan amount: The amount of loan that can be availed is directly proportional to the value of gold pledged. This flexibility allows MSMEs to secure loans that can meet their specific capital requirement whether it is for new machinery, expansion, employee salaries, or other business purposes.
2. No requirement of external collateral: Compared with other credit options, where external assets are required to be pledged as security, more than 25,000 tons of physical gold valued at $1.69 trillion is already sitting idle in Indian households or in bank lockers. This gold may be used by small business owners to secure loans to meet the credit needs of MSMEs.
3. No credit history required: Young entrepreneurs or new business owners with lesser credit scores or no credit history may often face challenges in obtaining easy financing. However, gold loans are secured against the appreciating value of gold, reducing the risk assumed by lenders and making it easier for MSMEs to raise capital.
4. Competitive interest rates: Since credit is secured with gold, these loans come with lower interest rates as compared to other unsecured loans, thus proving favorable to small business owners by reducing their overall operational cost.
5. Quick and easy access to funds: Unlike other unsecured loans that require extensive paperwork and lengthy approval processes, gold loans generally require minimal documentation. This reduces the administrative burden on small businesses who require urgent funds and speeds up the loan approval process without prolonged waiting period.
6. Repayment flexibility: Gold loans usually offer bullet repayment options allowing MSMEs to repay the entirety of an outstanding loan amount (including principal and interest amount) at maturity which can help MSMEs manage their working capital more efficiently and choose a repayment timeline that aligns with their cash flow.
7. Continued ownership of gold: Although gold is pledged, the borrower retains ownership of the jewelry. Once the loan is repaid, the gold is returned to the borrower, thus ensuring that the small business owner’s valuable family assets that may have been passed down through generations are safe.
8. Reduced risk of default: Given that gold loans are secured with a valuable tangible asset having sentimental value, it is a reassurance to both lenders and borrowers thus fostering a more stable financial arrangement.
The magic of digital integration
Although the process of securing a gold loan requires physical submission of these valuable assets for evaluation, once the gold is deposited, technology integration such as digital record-keeping and automated systems can facilitate faster loan approvals and disbursements. Besides, the RBI’s recent push for NBFCs to not disburse loans of ₹20,000 and above in cash will encourage more digital transactions. Additionally, mobile banking apps will provide MSME borrowers with easy access to loan details and repayment options online. This not only enhances transparency but also integrates small business owners into the modern digital economy and strengthens their credit history.
These distinct benefits of gold loan, coupled with digitalization of services, will not only provide India’s MSMEs a robust financial foundation to foster innovation; but also create more jobs and promote entrepreneurship.
(The author is Managing Director, Muthoot Finance)
