Budget 2024 and Financial Inclusion: Will gold loan come under priority sector lending?

Gold loans, often considered a last resort during financial emergencies, have significant potential to unlock liquidity at the grassroots level while instilling solid financial discipline. According to the World Gold Council, Indian households collectively hold about 25,000 tonnes of gold, cementing their position as the world’s largest holders of this precious metal.

Expanding gold credit into priority sector lending can integrate this substantial gold wealth into the formal financial sector, thereby addressing the challenges currently posed by limited credit supply in rural India.

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In response to the frequent request to designate them under priority sector, it is important that small-scale gold loans, amounting to Rs 50,000, and loan-to-value (LTV) ratio more than 75%, are permitted under microfinance. The debt should be equalised. , This equality is essential to strengthen financial inclusion.

Additional measures for concessional credit in this sector could explore the huge potential of dormant gold reserves, especially in rural India, where credit supply is a worryingly low 8%.

Unlocking Liquidity at the Bottom of the Pyramid:

Gold loans have emerged as a reliable financial safety net in times of crisis, providing individuals with a means to access immediate funds. By recognizing their importance in mitigating financial emergencies, Budget 2024 can attempt to unlock the huge potential lying dormant at the bottom of the economic pyramid. The move towards classifying gold loans under priority sector can boost the commitment to provide financial services to those who need it most.

Similarities with Microfinance Loans:

Drawing parallels between gold loans and microfinance loans, the proposal advocates treating small gold loans (up to Rs 50,000) with LTV more than 75% at par with microfinance loans. This strategic alignment is not just symbolic but promises to promote greater financial inclusion.

Microfinance institutions have long been at the forefront of reaching the underprivileged, and offering ideas similar to gold loans could amplify the impact, delivering credit where it is needed most.

Concessional Loan Solutions:

Recognizing the important role of gold lending in the broader financial landscape, Budget 2024 may consider additional measures to facilitate concessional lending in this sector. This visionary approach aims to harness the hidden potential of the vast gold reserves spread across rural India. By providing the necessary incentives and flexibility to financial institutions, the Budget will help bridge the credit gap that has long hindered rural development.

Addressing the rural credit gap:

The claim that credit supply in rural India is only 8% underlines the urgency of transformative measures. Budget 2024 can help establish gold loan as a strategic lever to address this imbalance. By encouraging financial institutions to grant loans with more favorable terms, the Budget may attempt to ensure that rural communities have access to the financial resources needed for sustainable growth and development.

The recognition of gold debt as a powerful force in the financial inclusion narrative in Budget 2024 marks an important moment in India’s economic strategy. Aligning small gold loans with microfinance loans and introducing concessional credit measures can create a platform to unlock the hidden economic potential in rural India. As the nation moves forward, integration of gold loans into priority sectors could be a step towards creating a more inclusive and flexible financial ecosystem.

-The author is Founder-Radian Finserv. The views expressed are personal.

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