Loan against Gold

Who Gives the Better Deal?

Why would you pledge your precious gold jewellery for a loan when you can borrow from banks without collateral at almost the same interest rate? Or, why would you take gold loan from a non-banking finance company (NBFC) knowing that there are other options available in the market?

The answer is simple. As loans against gold are secured – with gold being pledged as collateral – obtaining a loan is hassle-free, requires little documentation, has easier repayment options and involves no processing fee. Those who cannot fulfil the strict eligibility and documentation criteria of banks can easily avail of gold loans. So then, which bank or NBFC provides the best gold loan option and what are the advantages/ limitations of the same? What elements should one look at before availing the gold loan? These and more such queries that may bother you have been addressed in this report.

Team CV thoroughly analyzed gold loans offered by the top non-banking companies as well as by popular banks and compared and rated them on the parameters that would matter the most.

What Is It?

As the name suggests, gold loan is loan obtained against gold – gold jewellery or coins are mortgaged

as collaterals. Many nationalized banks, private banks and other financial companies offer this loan at attractive rates. Many go for this loan for the short period to meet the requirement of their children’s education/marriage and to address other unexpected or urgent financial needs of the family. It is also gaining popularity as small businessmen believe that instead of keeping the gold idle at home or in a locker, it is better to avail a loan against it and invest in their businesses. Basically, like you mortgage property to obtain other loans, here you let the NBFC or the bank keep your jewellery as collateral and obtain loan up to 75 per cent of the value of your jewellery.

A Better Credit Option?

Gold in lockers gains no interest, but a loan against it can bring down your EMIs as it has a lower interest rate as compared to personal loans. The value of loan that you can obtain depends on the value of the gold given as security rather than your repaying capacity. Some commercial banks allow overdraft limits based on the value of the gold deposited with them. There is no repayment clause; instead, there is a standard interest rate on the overdrawn amount. It gets you revolving credit as and when the earlier availed amount is repaid either in full or in part.

A few of the banks also give loan against gold

coins issued by scheduled commercial banks.

Weightages to Identified Variables

Based on consumers’ preference and perception as brought out from the questionnaires framed for the purpose, we have identified the following variables as important and influential. Suitable points have been assigned to these variables to identify the best, good and fair buy ‘gold loan products’ in the market.

Charges You Should Know about

It is advisable to understand all the charges involved before taking a loan, as these charges could determine the amount that you may finally receive.

Loan processing

While some of the service providers have no processing fees, a few banks do charge a nominal processing fee for processing gold loan.

Valuation

These are the charges to be paid to the valuator/ jewel appraiser. These charges are also specific to the service provider and those having in-house valuators do not charge any extra amount for valuation. However, some banks have a provision for paying valuation charge every year beyond a certain cut-off limit of a gold loan.

Late payment penalty

Most of the service providers charge late payment penalty and this too can vary from one institution to the other.

Pre-payment penalty

While most of the service providers do not charge a penalty for repayment before the loan tenure is over, some have a minimal charge in place.

Documents Needed to Avail Gold Loan

Identity proof such as passport, voter ID card or driving license Address proof such as electricity bill, ration card, telephone bill or credit card bill For signature proof, one has to submit passport copy, driving license, PAN card or any other document bearing one’s signature

Two passport-size photographs A declaration to the effect that the gold offered as security for the gold loan is one’s own Interest payment mandate and mandate for selling off gold if the loan does not get closed by the tenure period or for any unpaid interest/charges

NOTES

On Assessment from BANKS

During our study of commercial banks’ branches (the ones authorized to permit sanction of gold loans), we observed that the branches lacked the will to issue gold loans. It seemed that they lacked requisite skills and product knowledge. Also, the branch staff shared the general public perception that very few consumers walked in to inquire about gold loans. We learnt that banks were not very enthusiastic about this loan as they perceived there was a higher risk involved as compared to regular loans.

This perception severely restricted Team CV’s efforts to meet consumers wanting to avail gold loan from banks. We also could not assess the service perspective. Hence, 100 per cent assessment of gold loan from banks has been done on the basis of product structure.

On Assessment from NBFCs

The product structure was constructed after obtaining inputs from the various websites of NBFCs handling gold loan. The facts on their websites were confirmed either through a telecon with their representative or through personal visits. We found that NBFCs were a bit hesitant about sharing the required information.

As we spotted walk-in consumers wanting to avail gold loans in these NBFCs, we were confident of getting the information from the demand side. Since most of the NBFCs extend non-banking services, their main thrust is on ‘gold loans’ as this loan product ensures growth due to the higher rate of interest. In the case of NBFCs, where customer service plays a significant role in getting borrowers as well as sustaining long-term association with them, we have allotted 50 points on product structure and

50 points on service feedback for NBFCs, unlike banks where 100 points were allotted to product structure.