KOCHI, India (Commodity Online): The gold loan business run in the southern Indian state of Kerala is a big story in US media now. With several Gold loan enterprises flourishing in Kerala, the New York Times has written about the gold loan craze in Kerala in a big story which appeared in the paper this week.

According to NYT, Indians own more gold than the citizens of any other country. And now, gold has become a collateral for Keralites, and the basis of one of the country’s fastest-growing businesses, gold loans.

While pawning the family jewells 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 for them. This is the only way really that someone gets an instant loan within three minutes, says the NYT story.

For decades, pawnbrokers and money lenders have operated in India’s back alleys, making loans against jewellery to families in distress, at interest rates of 30 per cent or more. But gold loans made by banks and finance companies are different. Rates are lower — 14 to 30 per cent — 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. Muthoot Finance, a privately held firm, says its lending is growing at 60 per cent a year.

By contrast, total outstanding bank loans to the private sector increased 16 per cent 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 jewellery.

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 per cent 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 Gold loans are an essential financial tool. India’s mostly state-controlled banking system rationed credit tightly, lending mostly to the wealthy or to industries with government backing.

Though the financial system has become more inclusive, it still doesn’t reach many people. More Indians, for instance, own gold than own stocks or mutual funds. The total value of gold in private hands is roughly 60 per cent of deposits in banks, according to data from the World Gold Council and India’s central bank. A 2006 government survey found that less than 41 per cent of Indian households had bank or post office savings accounts. By contrast, 92 per cent of American households have bank accounts.

Historically, many Indians bought gold because they lived too far from bank branches and because high inflation devalued their rupees. This, economists say, kept the equivalent of billions of dollars in savings out of the financial system where it could have been lent out to build factories and pay for homes. Even though interest rates are still high and these loans don’t help the truly poor who have little or no gold, analysts say they do represent progress of a sort, allowing families to leverage some of their most valuable assets for productive uses.

Gold loans, so far at least, have very low defaults — companies say fewer than 1 per cent of borrowers fail to repay. Most jewellery is reclaimed in less than four months.

When borrowers don’t repay, their gold can be easily sold for more than the value of the loan. Still, the lenders do have some risk: for instance, the price of gold, which recently surged past $1,000 a troy ounce, could fall more sharply than some lenders are prepared for.

Executives say their business has grown because new financing methods and economic liberalisation have made it easier for them to raise money.

Securitisation — the packaging and selling of loans that became so popular in the American mortgage market, and wreaked such global havoc — has made it possible for lenders here to quickly redeploy money.

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