VSWASTING TIME for Muthoot Finance’s Kondapur branch in Hyderabad, it is usually 5:30 p.m. on a Monday. But on August 10, it was only two hours later that the director, Haripuri Padmavati, and her five colleagues were able to close the doors. More than 150 clients had visited the gold-backed lender, six times more than a Monday before covid-19. Among the borrowers were those caring for infected family members; those who had lost their jobs but had big bills to pay, such as school fees; and business owners who have to pay their creditors and employees. The average loan amount was 50,000 rupees ($ 700).

The pandemic has created enormous uncertainty about bank loan losses. Business in Muthoot, however, is booming. Loans are extended for one year in exchange for collateral in the form of gold – usually a bracelet or necklace of the type that lights up Indian weddings. The whole loan process usually takes 15 minutes. The jewels are weighed, then scratched on a small square stone. Acid and salt are applied to the scratch, to test for purity; 5-10% of the elements fail. With experience, says George Alexander Muthoot, chief executive of the company, you can tell by touch. During a video call with your correspondent, he demonstrates by putting a chain in his palm, rocking his hand left and right, then opening his fingers with a nod and a smile: appreciation over.

Muthoot has grown steadily since the early 1950s. It has over 5,000 branches serving 250,000 customers per day, ranging from construction workers to HE professionals. Total loans exceeded $ 6 billion in the year ending March. Muthoot is the largest of the formal gold-backed lenders: collectively, their assets stand at $ 40 billion. Small lenders, who give loans worth twice as much, charge annual interest rates of up to 50%. Muthoot charges 12-24%, as do his direct rivals. The banks, which go on tiptoe, charge a little less.

When the price of gold rises, as has happened for much of the past several months, a customer’s ability to borrow also increases. But the biggest risk for lenders is that the price of gold will fall, undermining the value of collateral. To provide a buffer, regulators had required loans to be less than 75% of the value of the collateral. On August 6, the limit for banks was raised to 90%. But the price of gold fell 5% on August 11 – a reminder of why the buffer exists. Muthoot follows the old rule.

The greatest virtue of gold-backed finance, however, is how well it fits in with India’s long-standing love for the yellow metal. Over the past decade, despite high tariffs, India has imported 8,400 tonnes, more than the holdings of the US Federal Reserve, the world’s largest depository. The falls of bargains are often channeled in gold. Jewelry bought in times of plenty becomes collateral when things go wrong – “poor man’s insurance,” says Muthoot. What makes his business particularly lucrative is that borrowers work so hard to redeem their collateral, not only to help guard against future trouble, but to adorn the good times ahead. ■

This article appeared in the Finance & Economics section of the print edition under the title “Financial Alchemy”