In a growing economy, the role of financial inclusion is needed, and for that, citizens must have basic finance and banking services from the traditional medium. Without proper banking service, a person can’t have the capability to open a bank account or take a loan during any financial drench.
For a person who is into agriculture, taking a loan during the crop season is a necessity, and for that, one needs to get help from the banks that can facilitate the loans. However, here comes a catch: since the majority of people don’t have a history of taking loans, that doesn’t create a credit history of the person.
Here come gold loans as an option where a person has the chance to integrate into the financial system, and through that one can make an impact in their banking history and can work as a first step to create a credit history for that person.
How Financial Inclusions Taking Place in Rural Areas
In rural areas, we find that the majority of the people still visit the loan sharks, and that creates financial constraints for the inhabitants as they take a high amount as interest. Any failure in payment can bring immense perils to the borrower without any chance of loan restructuring.
Here comes the loan agent from the traditional banks that are registered under RBI, and these institutions are the ones that are building ventures in the Tier 2 and 3 parts of the cities. The banks are starting their operations in those areas, allowing people to make savings accounts, and that brings all the individuals in that area under the banking system. Their finances are now visible to the large institutions.
Gold Loan Acting as a Financial Vehicle
Gold loans are one of the best ways through which people in rural or underserved areas can bring themselves under the credit meter of the banks. These individuals used to take loans from private lenders, and that has created a shadow banking environment in the majority of rural places.
With gold as a collateral banks can offer these farmers and other professionals of that area loan options that they can repay by paying a certain interest rate, which is the industry standard. There are several benefits of gold loans and why they act as a single proponent that will bring the majority of the people under the financial wing of RBI.
- Accessibility in All Areas
Gold is one such asset class that brings a lot of people under the banking roof. India has a high density of gold purchases and many families are there who have gold in the form of jewellery.
Here comes the role of banks that give those farmers or other primary workers some loans for their venture, and then they can repay that within the stipulated time giving credit facilities to a much larger customer base, bringing organized financial services to the people.
- Universal Value of the Metal
Gold is one of the precious metals, and its price always rises with time. Therefore, for the banks and other NBFCs, it’s quite a risk-free venture that allows the company to provide loans to those underserved areas.
The value of the gold determines how much the institution can provide loans to the customer and that minimizes the risk of the banks.
- Helps to Build the Credit History
Once a person comes under the traditional banking system, the first thing they have is the credit history from the gold loan. A person who pays the EMI on time and closes the loan account properly has a higher credit score.
It gives them the opportunity to raise funds next time without having any collateral or to use other financial tools like a credit card that allows a 30-day interest-free loan within a stated limit. Now comes the web aggregators like the finance DSA app that have agents who can then connect the borrower with the right lender to get the loan of their terms.
These are the facilities a person can then enjoy once they start building their credit score and maintaining it properly.
All these efforts are coordinated efforts from both the private and public sectors to bring the rural parts of India under the banking system by adding services that can allow the country to create economic value in all parts.
