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Should one Take a Gold Loan in India? What is the Eligibility to Avail it?



One has surely faced a situation where funds are needed in an emergency and there is a shortfall of cash. It is in such a situation that one remembers the family gold ornaments. This is not a situation anyone would want to be in but desperate needs call for desperate measures. There have been cases when many successful businessmen especially in the construction business have had to mortgage the family gold in order to tide over an emergency .In rural households gold jewellery is available sometimes in plenty but there is a paucity of cash. The gold loan is a popular route for raising cash particularly for medical and other emergencies. Availing a gold loan is no longer taboo and is gaining popularity in middle income families.

What is a gold loan?

A gold loan is basically a loan obtained from a bank or a non banking finance Company. One has to pledge gold jewellery or gold coins in case of banks. In the case of a non banking finance Company only gold jewellery can be pledged. The gold needs to have a purity of 18-24 carats. Loans are sanctioned after the proper scrutiny of the documents and the quality of the gold. The loan amounts are dispersed in the form of cash, demand drafts or an account transfer.

These loans are also called emergency loans as they can be procured in a hurry and are very convenient. They are popularly marketed as 5 minute loans. These loans are more popular than personal loans as they are secured in nature. Non banking finance Companies follow a liberal procedure when it comes to sanctioning these loans as they are secured against gold jewellery. One can literally walk in with gold jewellery and walk out with a gold loan from a non banking finance Company in a matter of hours. On repayment of the borrowed amounts the gold jewellery is returned.

What is the eligibility criteria for availing a gold loan in india?

  • The minimum age to avail of a gold loan in india is 21 years and the maximum age is 65 years.
  • The purity of the pledged gold should be of 18-24 carat.
  • Banks have a loan to value ratio of 70-80%.This basically means for every INR 100 worth of gold pledged an amount equal to INR 70-80 can be availed as a gold loan. Non banking finance Companies have a loan to value ratio capped at 60%.
  • Banks offer gold loans at the rate of 11-17% per annum .A processing fee of 1-2% is charged on this loan. Non banking finance Companies charge a rate of 15-26% per annum on these loans in spite of having a lower loan to value ratio.
  • Banks accept a pledge of both gold coins and gold jewellery. Only gold jewellery can be pledged with Non banking finance Companies.This is because it is believed that even if gold price crashes the borrower would want to reclaim the gold jewellery as emotional value is attached to it. This is particularly true if it is the family gold. Gold coins have no such emotional value .If precious stones and semi precious stones are present in the gold jewellery then only the value of the gold is taken into consideration. Gold bars are not accepted by both banks and non banking finance Companies.
  • Documentation involves an identity proof, residence proof, signature proof, passport size photographs, fulfilling of know your client norms and a note stating the ownership of the jewellery. Furnishing of the PAN card details might be necessary for a loan of INR 5 Lakh and above. The quality of the gold is then checked. Gold of 22 purity carats is generally accepted with some banks and non banking finance Companies even accepting 18 carats of purity. Cash is then obtained over the counter or as an overdraft. The entire process could be over in a couple of hours.
  • If the repayments are not made non banking finance Companies melt the gold jewellery and auction it within 18 months. Banks might wait 36 months before auctioning the gold.
  • The tenure of gold loans is generally 1 year but can go up to 3 years for a non banking finance Company as well as for banks.
  • Gold loans from banks have to be repaid in EMI factoring in both principal and interest payments. In addition bank might also charge a pre payment penalty if the loan is prepaid as high as 5% on the outstanding loan amounts. Non banking finance Companies offer the option of only interest repayments with the principal coming up for repayment at the end of the tenure. Prepayment penalty is also waived off.
  • Banks have a requirement wherein a salaried employee has to have a take home pay of INR 15000-20000.The maximum amount lent by the banks is generally around INR 15 Lakhs. One can obtain a loan of even 1 Crore by pledging gold with Non banking finance Companies.
  • Agriculturists can avail loans against gold at nominal rates of interest of around 7-8% with the necessary agricultural documents as proof.

What are the special schemes that can be availed for a gold loan in india?

Certain banks offer a special feature known as an automatic sweep facility. One has to open a savings bank account at the branch of the bank. An ATM card and a cheque book are provided. The gold loan amount is transferred to this account as an overdraft amount and can be withdrawn from any bank and any branch using the ATM card. Purchases can also be made by swiping the card and using the loan amounts. The savings bank account comes down to zero and the overdraft amount then kicks in. Amounts can be withdrawn using the cheque book facility. The banks have a maximum tenure of repayment of 3 years and a maximum quantum of loan sanctioned can be INR 70-75 Lakhs. The loan to value ratio may be 75%.The processing fee depends on the bank and a transaction fee might also be charged. If a gold bangle which has been pledged is replaced by a gold bracelet then the transaction fee kicks in .If the entire loan amount sanctioned on pledging the gold ornaments has not been used then one can take back part of the jewelry use it and then re pledge it. The loan limit might come down due to this. Interest payments have to be made on a daily basis based on the amounts withdrawn.

If Gold price crashes is it a good idea to default on that gold loans in india?

Let us consider Mr Sumith had taken up a gold loan in December 2011 from a popular non banking finance Company. The price of gold per 10 grams was around INR 29000.Non banking finance Companies used to have a loan to value ratio of 80-90% in the year 2011.It has now been capped at 60%.The loan amount of INR 23200 was availed by Mr Sumith at a loan to value ratio of 80% on pledging gold jewellery of 10 grams. The interest rate charged was 26% per annum charged on the gold loan compounded quarterly. The tenure of the gold loan was 2 years.

P = Initial amount borrowed.
r = annual rate of interest.
t = number of years the amount is borrowed for (t=2).
A = amount of money accumulated after n years including interest.
n = number of times the interest is compounded per year (n=4)
A = 23200(1 + 0.26/4) ^8 = 38400.

Thus an amount of INR 38400 has to be repaid in a couple of years by Mr Sumith. Non banking finance Companies offer the option of only interest repayments with the principal coming up for repayment at the end of the tenure. In April 2013 gold prices crashed to INR 24000 per 10 grams. Mr Sumith had made interest payments of around INR 9000 from December 2011 to April 2013.The principal comes up for renewal at the end of the term under the bullet repayment structure. If Mr Sumith defaults on his gold loan at this point he can save on about INR 6000 worth of interest payments as well as INR 23200 worth of principal payments totaling around INR 28200.Mr Sumith will forego the gold jewellery but can purchase the gold at its current value of INR 24000 per 10 grams.

Should Mr Sumith default on his gold loan repayments?

If Mr Sumith were to default on his gold loan repayments his credit score would be impacted and he would not be able to avail any loans in the future. This would particularly impact him in case he wanted to avail of a home loan at a future date. Credit Information Bureau of India Limited (CIBIL) maintains the past credit history of borrowers and Mr Sumith would be a defaulter impacting his credit score.

What are the advantages of taking a gold loan?

  • Gold loans are secured against gold coins or jewellery as compared to an unsecured personal loan. Gold loans taken from non banking finance Companies have hassle free documentation and no processing fee.They can be obtained in a matter of hours if the borrower fulfils all the necessary criteria. In case of personal loans the sanctioning of the loan is a time consuming process as they are unsecured in nature. The lender has no security in case of a default.
  • The interest charged on a personal loan is around 16-22% per annum. The interest charged on a gold loan from a bank can be around 11-15% per annum .These translates to be a huge saving in interest payments.
  • In case of a personal loan processing fee is around 2-2.5% of the loan amount sanctioned. Pre payment charges are 4-5% of the principal amount outstanding and also depends on the lender, loan amount and the time period. Gold loans taken from non banking finance Companies have no prepayment charges and processing fees.
  • Customised products are being launched by non banking finance Companies such as gold loan products where the interest rates charged differ based on the time period or tenure of the gold loan.
  • The maximum quantum of loan sanctioned in a personal loan is INR 50 Lakhs. One can obtain a loan of even 1 Crore by pledging gold with Non banking finance Companies.

I would like to end this article stating that gold loans are a major source of emergency funding in rural areas where gold ornaments are present in large amounts in households but there may be a paucity of cash .Gold loans help to raise this cash as and when needed. This trend is now on the rise among the middle class families in India and the need and demand for gold loans can only rise.

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