Keep LTV below 75% to avoid topping up
collateral on price fall
Despite the Reserve Bank of India’s (RBI) directive in May 2024 limiting
cash disbursements to Rs 20,000, the popularity of gold loans remains
undiminished, according to rating agency CRISIL. In June, gold loan
disbursements grew by 12 per cent. The assets under management (AUM) of Muthoot
Finance, the largest player, grew by 28 per cent in the first quarter of
financial year 2024-25. What accounts for borrowers’ enthusiasm for these loans?
Borrowers find it more convenient than other forms of credit.
Borrowers favour gold loans due to their lower interest rates, minimal
documentation, and quick processing. These secured loans against gold or
jewelry are particularly useful for meeting short-term financial needs,
especially during emergencies. While gold loan interest rates range from 8.8
per cent to 19 per cent, unsecured personal loans can charge between 9 per cent
and 45 per cent.
Only address and identity proofs are necessary for gold loans.
Furnishing proof of income is not required. Lenders follow RBI guidelines and
verify borrower’s Know Your Customer (KYC) details.
The processing time is short. The only time-consuming part is the
physical validation of the quantity and purity of the gold provided as
collateral. Once that is done, the turnaround time is a few hours. According to
RBI guidelines, the loan-to-value (LTV) ratio cannot exceed 75 per cent. This
implies that if the gold is value at Rs 100, the upper limit for the loan is Rs
75. At lenders portfolio level, the LTV is much lower – around 63-65 per cent.
Most NBFCs charge a processing fee between 0.25 per cent and 2 per cent
of the loan amount. Some charge a fixed sum, while others waive it. Loan
tenures vary between 3 months and 5 years. Some lenders offer full or partial
prepayment without penalties.
Some lenders allow repayment of both principal and interest at the end
of the loan tenure.
Others offer loans as overdraft facility, which makes them a good option
for those seeking to manage short-term fund shortages.
Compare rates and tenures
Before taking a loan, check the lender’s reputation, especially its
expertise in gold loans. If gold loan disbursal is part of a lender’s core
business, it will customize and personalize choices for each borrower, and
offer superior services.
Compare interest rates and loan tenures of various players. Also, find
out the lender’s policy related to insurance of the mortgaged gold and whether
it is stored securely.
Avoid overleveraging
Only borrow an amount that can be repaid comfortably. The ratio of total
EMI to take-home salary should not exceed 40 per cent.
Assess carefully if a loan is better than selling the gold to fulfil one’s
obligations. Selling can be an emotional decision, but it may sometimes be
wiser due to the high interest and repayment terms of a loan.
Post-budget 2024, which reduced customs duty on gold, prices fell and
then recovered. If the LTV ratio of and existing gold loan exceeds the cap of
75 per cent 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 fail to do so, lenders can sell their gold.
For More Details: Pooja Manoj Gupta, visit www.giia26.com
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