Financing the golden way

The past few months have seen gold rising to the top of its glory. Gold rates had risen to a record high level of over $1,250 in the past month and it has become an investment haven for many.
The State Bank of Pakistan further exalted the status of gold by recently including gold ornaments and bullion as liquid assets for consumer and SME financing. In simpler terms, this means that the banks will now be able to accept gold as a liquid asset for extending credit to consumers and SMEs.
Speaking to BR Research, many bankers look upon the new regulation as a positive move that will increase credit growth in the long run. "Gold is easy to value, and is a relatively liquid asset, I see it as a very positive move for banks," said a senior banker.
Because of the relative liquidity, the new regulation is also anticipated to be of benefit to banks as far as provisioning requirements for non-performing loans are concerned, and the banks lending appetite is speculated to increase.
A few consumers have also expressed a positive reaction regarding the new development to BR Research. According to them, while other assets may not be available with them, almost everyone has some gold.
"I couldve never imagined obtaining a loan before because I had minimal assets. But given that this will be implemented, Id be able to finance my capital needs from a small loan against gold," said a small business owner.
However, many factors need to be borne in mind before a sound practice of using gold as a liquid asset for consumer and SME financing is established, the need for thorough valuation being one of them.
The weighing and valuation of the gold accepted by banks should be done in methods approved and authorized by a regulator such as the state bank. This has to be ensured to avoid subjectivity while calculating the real worth of the metal being left with the bank.
Further, with gold prices rising exponentially, and the consequent fears of it taking a U-turn, the deductible margin and the value at risk of gold have to be carefully thought over. Banks have yet to do their homework on that.
Not to forget, banks have to stress more on the cash flows of a potential borrower than anticipate the consequences of a credit default.
On the consumer side, though relatively younger people were more receptive of the new regulation, the older ones expressed a resistance owing to mistrust of the banking system. They were also hesitant because of the uncertainty regarding zakat payments on gold held by the bank.
Perhaps, increased consumer education in this aspect would be a good idea. In a long run, this move is expected to improve credit growth in consumer financing, which has been at a downward trajectory in the recent past.
However, while this step does bring a promise of improving credit growth, the fall in the same has not been solely due to the absence of adequate collateral.
Other factors such as the effects of an economic slowdown, rising inflation, heavy government borrowing from the banking sector, rising NPLs and the consequent reluctance of banks to lend out money, should also be paid heed to in order to revive credit growth in the country.
Thus, theres a long way to go and a lot of strategic planning to be carried out before the implementation of the proposed regulation takes effect successfully.