Loans against Gold is traditionally considered taboo in households. Even when gold is pledged, it is still done as the last resort. Gold jewellery at home is considered on par with "Goddess Lakshmi" and hence hedging gold for a loan is considered inappropriate.
Gold loan market: This perception towards Gold loan has gradually undergone a change and individuals have started seeing the value of loan against gold as against availing a personal loan. The Gold loan market that was highly fragmented and dominated by local jewelers, has gradually seen the entry and growth of NBFCs and banks; a clear indication of the viability of gold loans as an important loan product.
The gold loans market has recently seen a lot of action from both the consumers and the industry. With gold spiraling upwards, borrowers are able to get decent valuation for their gold; and the process of getting such a secured loan is also largely hassle free. The southern Indian markets have been particularly lucrative for the gold loan business; ~ 85% - 90% of the gold loan market is in the States of Andhra Pradesh, Tamil Nadu and Kerala.
According to an estimation of the ICRA Management Consulting Services (IMACS), the organized gold loan-market in India stands at $8 billion and is growing at a compound annual growth rate (CAGR) of 40% since 2002. There is still ample potential in this segment and with more banks /NBFCs coming into this business, there could be considerable growth in terms of volume.
Below are the prominent features of Gold loans.
| Secured | Loan is borrowed against the gold deposited by the applicant. |
| Low disbursal times | NBFCs and the unorganized sector disburse loans at a much faster pace as compared with banks which may take a few days. |
| Loan-to-value (LTV) ratios | With the RBI's latest norms, the gold loan extended would be as low as 60%-65% |
| Tenure | There is no minimum period for the loan and, if need be, one can return the loan amount the very next day. The average tenure of the loan is about 90 to 100 days. The tenure would normally not exceed 1 year |
| Varied interest rates | The interest rate depends on the tenure and amount of loan. It varies from 12% to 18% in the case of banks, while for NBFCs, it could reach 24%. The interest rates charged in the unorganized sector are much higher and can range from 30% to 50%. Reasonable rates of interest are especially applied if the loan to value (LTV) does not exceed 50-60%. |
| Multiple repayment options | Repayment can be structured as just interest amount with principal being repaid at the end of the period in one lump sum. Repayment through EMI, covering interest as well as principal, can also be an option. |
Personal Loan vs. Gold Loan:
Personal loans are mostly unsecured loans taken for a variety of purposes. Gold loans are secured loans taken by keeping gold as collateral Personal loans are dependent on income drawn, ability to repay and credibility, and at times the bank/NBFC may even demand a surety. Gold loans are extended based on loan to value ratio; with the latest RBI guidelines, the loan-to-value could range between 60%-65%, as compared to the earlier 70%-75% Gold loans are short term loans and one mostly does not associate EMIs with them (although this is now being offered as an option by newer entrants in the gold loan segment). Thus if the seeker is on the lookout for a long term loan with repayment in the form of EMI, a personal loan is more suitable over a gold loan Gold loans may also work out cheaper, given that the personal loan is extended without any underlying asset. There is that much more due diligence / paper work to be conducted by the bank/NBFC in the case of an unsecured loan. Interest rates on Gold loan are generally lower, considering the underlying assurance, incase of the personal loan, the bank runs a huge loss of default, hence the higher rate.
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