According to rating agency CRISIL, despite the Reserve Bank of India (RBI) directive of May 2024 capping cash disbursements at Rs 20,000, the popularity of gold loans remains intact. In June, gold loan disbursements grew by 12 per cent. Assets under management (AUM) of Muthoot Finance, the largest player, grew by 28 per cent in the first quarter of fiscal year 2024-25. What is behind borrowers’ enthusiasm for these loans?
“Borrowers find it more convenient than other forms of credit,” says Shaji Varghese, chief executive of Muthoot FinCorp.
Low cost and easy access.
Borrowers prefer gold loans due to their lower interest rates, minimal documentation, and quick processing. These loans secured by gold or jewelry are particularly useful for covering short-term financial needs, especially during emergencies. While gold loan interest rates range from 8.8% to 19%, unsecured personal loans can charge between 9% and 45%.
For gold loans, only address and identity proof are required. Income proof is not required. Lenders follow RBI guidelines and verify the Know Your Customer (KYC) details of borrowers.
The processing time is short. The only part that requires time is the physical validation of the quantity and purity of the gold provided as collateral. Once this is done, the processing time is just a few hours.
As per the Reserve Bank of India guidelines, the loan-to-value (LTV) ratio cannot exceed 75 per cent. This implies that if gold is valued at Rs 100, the upper limit of the loan is Rs 75. “At the portfolio level of the lenders, the LTV is much lower, around 63-65 per cent,” says Varghese.
Most NBFCs charge a processing fee of between 0.25% and 2% of the loan amount. Some charge a lump sum, while others do not. Loan tenures vary from 3 months to 5 years. Some lenders offer full or partial prepayments without penalties.
“Some lenders allow repayment of both principal and interest at the end of the loan term. Others offer loans with overdraft facilities, making them a good option for those looking to manage short-term cash shortages,” says Sahil Arora, Business Head (Secured Loans), Paisabazaar.
Compare rates and tenures
Before applying for a loan, check the reputation of the lender, especially its experience in gold loans. Varghese believes that if gold loan disbursement is part of a lender’s core business, they will customize options for each borrower and offer superior services.
Compare interest rates and loan terms from various players. Also, find out what the lender’s policy is regarding insurance of the mortgaged gold and whether it is stored safely.
Avoid overdelivering
Borrow only an amount that you can comfortably repay. The ratio of the total installment to your net salary should not exceed 40 percent.
“Carefully evaluate whether a loan is better than selling the gold to meet your obligations. Selling can be an emotional decision, but it can sometimes be more sensible due to the high interest rates and repayment conditions of a loan,” says Mohit Gang, co-founder and CEO of MoneyFront.
After the 2024 budget, which reduced duties on gold, prices fell and then recovered. “If the loan-to-value ratio of an existing gold loan exceeds the 75 per cent limit due to a sharp fall in domestic gold prices, lenders can ask borrowers to pledge more gold or deposit cash to bring the ratio within the limit. If borrowers default, lenders can sell their gold,” says Arora.
First published: August 21, 2024 | 18:34 IS
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