In this episode of Dhan ki Baat, we explain how gold loan can come to your rescue during a financial crisis.
India is one of the largest consumers of gold and accounts for almost 10% of the world’s gold stock. According to the World Gold Council, Indian households are laden with an estimated 23,000-24,000 tonnes of gold reserves, out of which 65% is in houses in rural areas.
Gold loan is a traditional form of loan and has been in existence since times immemorial. Initially, the market was driven by money lenders and pawn brokers,who would usually lend money at exorbitant rates, at times as high as 3-5% per month (30 -60% per annum). The unorganised sector still holds 76% of the overall market.
In the recent times, gold loans have been gaining popularity with the foray of organised players such as NBFCs and Banks. The organised players are regulated by the RBI. Hence, unlike the organised sector, they are transparent and have to exercise some restrictions while lending. This has given an opportunity to the underpenetrated segment to gain access to finance at reasonable rates, thereby leading to Financial Inclusion.
It is essentially a loan against gold jewellery. As per RBI, Banks and NBFCs cannot lend against bullion/coins and bars.
Tenure -It is a short tenure product and you can borrow from one week to one year depending on your requirement.
Rate of Interest – Rate of interest varies from one organisation to another.For NBFCs, the rate of interest typically varies from 12 to 24% depending on the tenure of loan and gold quantity.
Loan to Value – As per RBI, Banks and NBFCs can lend up to 75% of the gold value (LTV).
Security of gold – Security of gold is the responsibility of the lender. The precious metal is stored in Banks and NBFCs in vaults. It is also insured to protect the customer’s interest in case of robbery/theft.
Repayment – You are required to pay interest and can pay principal at the time of closure of a loan. You can repay interest on monthly/quarterly/half yearly or annual basis.
Gold Loan is an easy and transparent loan with no hidden costs/clauses.Anyone with physical gold, identification documents and address proof can get one from Banks or NBFCs. The biggest advantage is that it is instantaneous and can be availed anytime. Your loan amount can start from Rs3,000.
Non-banking sources lend as much as 9.25 lakh crore to business, crushing the bank credit flow of 5.02 lakh crore. The unwillingness of banks and the sophisticated process of obtaining loans has pushed the business more towards the Non-Banking institutions.
Quick Loan disbursal - Gold loan can be disbursed in 30 minutes and therefore it is very convenient.
Minimal paperwork - You are required to submit proof of identification and address, and a PAN card to get a gold loan.
Flexibility of repayment - You need to pay service interest during the loan period and can repay the principal in full at the time of closure of loan.
Transparent processing system - Unlike the unorganised sector, you have to submit all identity and address proofs to get a loan.
Safe custody of gold - Gold is kept safely in vaults at Banks and NBFCs.Strict measures are taken to ensure safekeeping of the yellow metal.
Business needs - Customers take a gold loan to meet their working capital requirements. Typically, businesses, which witness a gap between manufacturing and sales numbers, find a gold loan convenient. For example,exporters, public work contractor are more likely to take a gold loan.
House purchase - Funding margin money
Medical emergencies - Family exigencies
Children’s education- Building a corpus to fund a child’s higher education
Consumption related - Purchase of goods, renovation of house, or for child’s marriage
Agriculture - Farmers avail this loan at the time of sowing seeds and repay at the time of harvesting
Mr.Saurabh Kumar is Business Head for Gold Loans at IIFL. He has more than 16 years of experience and has worked with leading organisations such as ICICI Bank, Muthoot Finance, Godfrey Philips and UB Group. He has worked extensively in the Gold loans, MSME and financial inclusion segments. With his grounding in agriculture sector, he brings with him a strong understanding of rural consumers, farmers and MSME customers’ needs and challenges inherent to the sector. He is passionate about leveraging technology to build scale and sustainable solutions for development.
Any kind of gold jewellery/ornament of purity 18 karats and above can be provided as security to avail a gold loan.
As per RBI, gold loans shall not be granted against bullion / primary gold and gold coins.
It usually takes 30 minutes to process and disburse a gold loan.
You need to provide Aadhaar Card and PAN Card/Form 60.
Subject to purity of the gold pledged, you can avail a loan amounting to maximum of 75% of the current market value of your gold as per regulatory limit.
Only parts that are gold in the jewellery are used to calculate the value. Other metals, stones and gems are excluded from the calculation.
Disbursal can also be done in a number of ways, including cash (subject to limit as specified by Income Tax Act, 1961), NEFT, RTGS, IMPS and Prepaid Card.
The loan amount cannot be used for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold exchange traded funds (ETF) and units of gold mutual funds.
The gold ornaments pledged are secured in a fire and burglary proof vault in a Gold Loan branch. Many NBFCs/Banks also deploy electronic surveillance to monitor the valuables.
Almost all gold loan companies allow loans to be serviced by way of interest payment only with payment of the principal amount due at the end of the tenure.
There are multiple modes of repayment, including cash (subject to limit as specified by Income Tax Act, 1961), NEFT, RTGS, IMPS and Debit Card.
Yes, you can, once you have paid back a part of the loan amount as per the value of gold.
If you fail to settle the loan account or repay interest/instalments/principal amount/any other amount, post the completion of loan tenure or otherwise, the lender reserves the right to sell any of the pledged articles in a public auction after serving a notice of 10 days to the address provided by you. The auction will be announced to the public by way of issue of advertisement in at least two newspapers of which at least one newspaper shall be of a vernacular language and another shall be a national daily newspaper.
If the gold price falls below a certain threshold, the lender will intimate the customer to pay the margin amount called as ‘Mark to Market’ (MTM). This margin is equal to the amount required to maintain the LTV at 75% or below.
The pledged ornaments are usually covered by insurance and the lender would pay back the amount due to the customer.