Monetizing Gold as a loan collateral?

Gold Loans

In my article on “All that glitters is – Gold!”, I had mentioned that Gold is used as a store of wealth. Many-a-times, during financial emergency, Gold Loans or Loan against Gold is used as an interim solution to solve the cash flow mismatch.  These gold loans are generally taken against gold ornaments / jewellery. The current pandemic has led to a surge in the demand for gold loan as the small businesses and individuals are facing interim cash flow problems.

What makes Gold Loans attractive?

• Low interest rates: Gold Loans are available at interest rates lower than personal loans. SBI offers gold loans as low as 7.5% per annum.

• Secured Loan: There is a high acceptability of gold as a loan collateral. Only gold ornament / bar needs to be provided, no other collateral is required.

• Purpose: There is no requirement to mention the end use of funds. It can be used for any purpose be it medical expenses or travel or marriage or emergency use or business requirement or any other purpose.

• Idle Asset: Physical Gold is generally kept in household or bank lockers and does not generate any income (Sovereign Gold Bond Scheme (SGB) which is in digital format is not an idle asset as it provides a 2.5% p.a. interest income. Infact, SGB offers a decent arbitrage - 2.5% interest income and say a gold loan is at 7.5% interest expense, hence effective loan rate is only 5%!). Gold can be used to raise capital for any of the above purposes.

How to avail Gold Loans in India?

1. Banks like SBI, ICICI Bank, Kotak Bank, HDFC Bank offering ~7-10% rate of interest p.a.

2. Non-Banking Finance Companies (NBFC’s) like Muthoot Finance, Manappuram Finance, Shriram City Union, or Bajaj Finance offering ~12-24% rate of interest p.a.

3. Traditional players like retail jewellers who charge an exorbitant rate of interest of 24%+

4. Modern day – digital platform of gold loans players like Rupeek

Indicative Gold Loan Rates offered by various Banks and NBFC’s:

It is important to know the list of the players which provide gold loans and the rate and other features (mentioned below) before one avail a gold loan. There are various sites available now like paisabazaar.com and bankbazaar.com which provide comparison across various players. Here is the list of Banks and NBFC’s offering gold loans along with the rate of interest and likely EMI per month:

One can use the following link to calculate the EMIs on the Gold Loan which they are looking to avail: https://www.paisabazaar.com/gold-loan-emi-calculator/

FinFact:

• Generally gold loan is given against physical jewellery. RBI allows Sovereign Gold Bond Scheme as a pledge for gold loans. However, the RBI has restricted banks and NBFC’s to lend against Gold ETFs or bullion.

• The organized gold loan market was ~Rs. 3.44-lakh crore in FY20 and is expected to grow at an annual rate of 15.7 per cent to Rs. 4.61-lakh crore in FY22 (Source: Hindu Business Line dated 10th Nov 2020).

• Average Gold Loan (for Muthoot Finance) is ~ INR 61,000 per customer (as on March 2021)

Few other things to consider while availing a Gold Loan:

• Loan to Value: ~75% of the gold value is available for loan against gold

• Loan Tenure: Generally, gold loans are short term loans and range from 3 months to 3 years.

• Interest Rate: ~7-28% is the interest rate charged on gold loans. These could be simple interest as well.

• Processing Fees: Processing fees include a valuation fee, foreclosure charges, stamp duty charges and statutory charges, renewal processing fee, if any.

Gold truly serves as a store of wealth and a tool to generate cash flows during an emergency!

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