Gold loan business In India

With demand and price of the yellow metal rising, loan against gold is also becoming popular. As of FY10, the organised gold loans market in India is estimated at around Rs 35,000-40,000 crore, registering a growth of 50 % over last year. At this level, the gold loan portfolio translates into a marginal 1.2 % of the value of total gold stock in India, indicating that the market is significantly under-penetrated and is expected to continue growing at the rate of 35-45 %.

According to IMACS gold loan report, as of FY10, the gold loans market is largely concentrated between two categories of lenders — south-based NBFCs specialised in gold loans accounting for around 32 % of total market and scheduled commercial banks holding another 58 % of the market. The rest of the gold loans portfolio is constituted by several small co-operative banks.”

Why a gold loan

Gold loan as a concept is already popular in the South India through many organised and un-organised lenders. South-based companies are looking to expand beyond South India with branch expansion and heavy advertisements. “South-based gold loan companies like us are expanding into North India as gold has now become a lifestyle product and most of the Indians buy gold. In times of need one can get a loan against gold within minutes with minimum formalities,” says Muthoot Pappachan Chairman & Managing Director John Muthoot.

Commodity experts feel that since gold as an asset class earns profit only when sold, it makes sense to use the metal to take a loan in times of emergency. Gold, unlike equity, does not earn any dividend. If you do not wish to sell it, but need money urgently, gold loan can be a good option. One of the best features of a gold loan is that you can get the loan on the same day itself. Also the interest rate you pay on the loan is comparatively lower than a personal loan and chances of getting the loan are higher.

Comparing personal loan and gold loan, Manappuram Finance Managing Director I. Unnikrishnan says, “in times of emergency you need a loan almost immediately with minimum documentation, and without any evaluation of your loan repaying capacity and if you have gold it can be a better option compared to a personal loan where all these factors come into play.” A number of public sector and private banks and non-banking finance companies (NBFCs) are offering gold loan.

Which lender to approach

Till now gold loans have been a bastion of small-time money lenders and NBFCs. But with banks looking at expanding the secured loan portfolio as against the unsecured personal loan, the options for the borrowers are aplenty. Most of the gold loan business are in the unorganised sector and NBFCs. Experts caution borrowers to make proper inquiry about the pedigree and the track record of the lending agency before pledging gold for a loan.

Says author of ‘Retire Rich’ PV Subramanyam, “try a public sector bank for taking gold loan as gold loan is a secured loan. Banks are well regulated, are sound and carry lesser risk compared to a non-banking finance company.” With high emotional value attached to the jewellery you pledge, it’s better to opt for a lender which is stable, well diversified and is in the gold loan business for a long period.

Interest rate & tenure

When was the last time you brought your negotiation skills into play? It’s time to use them now if you are looking for a gold loan. There are various parameters on which the tenure, interest rate and the level of negotiation would depend — like whether the gold is hallmarked or not, the tenure of the loan amount and what percentage of the value of the gold you would like to borrow.

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NCDEX Chief Business Officer Vijay Kumar has a smart advice for borrowers: “if you have a good quality hallmarked gold and the value of the gold you want to borrow is 60 % or less you may negotiate for lower interest rate from the lender.” Typically, the tenure on a gold loan falls between one year to two year with some lenders even extending loan for three years. The documents required are residential proof and a recognised photo identity for example a PAN card, voter Identity card or driving license. The banks may take an hour to a day to extend the gold loan. On the other hand, NBFCs like Muthoot Finance and Manappuram, going by their advertisements, extend the loan within minutes. The average rate of interest falls between 11 % to 14 %. However, some NBFCs are charging a much higher interest rate of 20-24 %.

What are the inherent risks?

Even though the gold loan may seem to be an easy option to borrow money there is a word of caution from the financial experts who advise that taking a gold loan for buying luxury items or for consumption purposes may not be a great idea.

Experts hence advise to go for a small loan and for a small tenure. Only if you think you can repay the loan should you go for the gold loan. Though gold loan lenders fall under the Reserve Bank of India’s supervision, there’re experts who doubt whether non-banking finance companies lending against gold are as strictly regulated as banks. Financial experts advise to take a gold loan in small sums and make sure that you have enough liquidity to repay the loan and get the gold back. The gold you have pledged with the lender is usually auctioned 12 months after the due date of repayment has lapsed.

If you have a short-term liquidity need and you are sure of repaying the debt in time you can count on the asset created by your wife — only if you take it out from your locker and unlock its value.