Why You Can’t Get A Loan to Purchase Gold in 2023 ?

On October 30, 2012, the Reserve Bank of India implemented a comprehensive prohibition, barring banks from extending loans to buy gold in any form—whether it be in the form of gold jewellery, gold bullion, gold coins, etc.

This step was taken by the central bank due to a discernible surge in the inflow of gold imports into India. Notwithstanding a 10% escalation in the price of gold, the demand for gold experienced a notable 27% surge during the July-September quarter of 2012. The substantial upswing in the volume of imported gold posed a considerable threat to the country’s trade balance. The central bank was apprehensive that the provision of jewellery and gold loans by banks was further driving the demand for gold.

Mitigating Threats to the Economy

This decision by the RBI came at a time of economic tumult and was a necessary precaution to protect the Indian economy from any unwarranted situations. Some of the reasons why the RBI banned loan for buying gold include:

Financial Stability:

If a significant number of individuals or businesses take out loans to purchase gold, it could potentially lead to an increase in demand for gold. This could result in higher gold prices, which might have implications for overall financial stability. RBI is concerned with maintaining stable economic conditions, and excessive speculation or investment in a particular asset (like gold) could disrupt that stability.

Risk Management:

If a large number of loans are given out for purchasing gold, it could pose a risk to the financial institutions lending the money. If the value of gold dropped significantly, borrowers might struggle to repay their loans, leading to potential loan defaults and subsequent financial instability in the lending sector.

Foreign Exchange Reserves:

In some cases, countries restrict gold imports to protect their foreign exchange reserves. Considering that loans were being used to finance gold purchases, it led to increased gold imports, affecting the country’s balance of payments and foreign exchange reserves.

Consumer Debt Concerns:

Excessive borrowing for non-essential items, such as gold, could also contribute to rising consumer debt levels. High levels of consumer debt can impact overall economic health, as individuals and households might struggle to meet their financial obligations if their debt burden becomes too high.

Speculative Activity:

If borrowing for gold purchases becomes widespread, it could attract speculative behaviour and investment bubbles. Such bubbles could eventually burst, leading to economic downturns and financial instability.

Control over Monetary Policy:

RBI uses tools like interest rates and money supply to control the country’s monetary policy. If a large number of loans are being used to purchase gold, it could complicate the central bank’s ability to manage the money supply and implement effective monetary policy.

Minimizing Illicit Activities:

In some cases, gold can be used for money laundering or other illicit activities. Restricting loans for gold purchases could be a way to control such activities and ensure that the financial system is not inadvertently facilitating illegal actions.

Alternatives to Buying Gold on Credit

Worry not, even if you cannot get a loan for buying gold, there are other financial pathways through which you can fund your gold purchases. Here are a few popular ways to buy gold:

Gold ETFs (Exchange-Traded Funds)

Gold ETFs allow you to invest in gold without physically owning it. These funds are traded on stock exchanges like stocks and can provide exposure to the price movements of gold.

Gold Mutual Funds

Similar to gold ETFs, gold mutual funds pool money from multiple investors and invest in various forms of gold assets.

Systematic Investment Plans (SIPs)

Some financial institutions offer SIPs specifically for gold. Investors can contribute a fixed amount at regular intervals, accumulating gold over time.

Gold Accumulation Plans (GAPs)

Some financial institutions offer GAPs that allow you to buy gold in small amounts at regular intervals, similar to SIPs.

Peer-to-Peer Lending Platforms

In some cases, peer-to-peer lending platforms may offer gold-backed loans or financing options.

Crowdfunding Platforms

There are crowdfunding platforms that allow individuals to pool their funds to invest in gold projects or ventures.

Gold Certificate Programs

Some institutions offer gold certificate programs, where you purchase a certificate representing a specific quantity of gold held in a secure vault.

In Summary

In retrospect, the Reserve Bank of India’s prohibition on extending loans for gold acquisition in 2012 marked a pivotal move to safeguard the nation’s economic equilibrium. Triggered by a surge in gold imports despite a 10% price increase, this intervention aimed to curb potential threats. The surge of 27% in gold demand during July-September 2012, coupled with escalating imports, posed a significant risk to India’s trade balance. The RBI’s vigilance stemmed from concerns that bank-provided gold loans fueled the demand further.

For those seeking gold exposure without credit-based purchases, diverse alternatives like gold ETFs, mutual funds, SIPs, GAPs, peer-to-peer lending, crowdfunding, and gold certificate programs provide prudent avenues to engage with this precious metal.

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.