Leveraging the yellow metal

Loans against gold can be used to retire credit card dues or personal loans.

Last week, Suhasini Krishnan woke up to a call from her native place, telling her about an urgent requirement of Rs 1 lakh. Dazed and confused, she decided to take her gold ornaments to a bank to raise funds.

Krishnan is not alone. According to industry sources, the loan-against-gold market stands at Rs 79,000 crore, both organised and unorganised sectors put together. The organised sector alone stands at Rs 40,000 crore, an increase of 40 per cent in the last one year.

According to non-banking financial company (NBFC) Manappuram Finance’s Group Chairman V P Nandkumar, “These loans are targeted at consumers in need of instant cash.”

Although the processing time can take from 10-20 minutes to six days, depending on the lender, these are not cheap. The minimum interest rate charged on loans against gold is 12-30 per cent annually, and you can borrow as low as Rs 2,000.

An advantage of these loans is that since jewellery acts as a security, fewer documents are required. Your credit score may also not be required. “Since these are collateralised loans, these are given easily,” says a senior executive from the State Bank of India. The flip side is that if you can’t repay the loan, your ornaments will be retained by the bank.(Click for table)

Lenders categorise ornaments in three brackets – solid (pure gold bangles), mediocre (stone-studded necklaces) and third (bracelets or chains). The lending rate/amount decreases from ‘solid’ to ‘mediocre’ to ‘third’, and so does the interest rate.

Financial experts say gold loans are better than personal loans as these are slightly cheaper. “Why take a personal loan when you can put your jewellery to use? You can always get rid of the loan once you have a surplus,” says V N Kulkarni of Bank of India’s Abhay Debt Counselling.

Typically, the annual interest rate on personal loans is 18-30 per cent, which is comparable at the upper end. But if one is able to strike a good deal with the financial institution, the rates can be cheaper.

Loan-to-value
It is the maximum loan provided against an asset. In case of housing, the loan-to-value (LTV) is typically 70-85 per cent of the value of the property. While taking a gold loan, banks or financial institutions provide 50-90 per cent of the value. Typically, if gold is at Rs 19,578 for 10 grams, institutions lend at Rs 17,000 for 24 karat gold. The final loan amount is worked out after subtracting the percentage of impurity, making charges of the jewellery, etc.

The interest rate offered by gold loan institutions depends on the LTV as well. For instance, the LTV for Rs 1 lakh worth gold ornaments from Muthoot Finance is Rs 70,000 at one per cent a month (12 per cent annually). But, if you need a loan of Rs 80,000 and you cannot pledge any more gold, the company will pay you a higher amount. It will be calculated as higher payment for each gram of gold. And, the interest rate goes up as the amount a gram increases. At present, NBFCs such as Muthoot Finance are offering Rs 1,560 for each gram of gold of purity 20 karat and above.

Biju Pillai, EVP and business-head (personal loan, gold loans, LAS and home loans), HDFC Bank, says, “Our loan to value is 80-95 per cent. The valuation is carried out by an impanelled assayer at the branch, in the presence of the customer. This ensures transparency.”

Price movement impact
If the international gold prices slide, your loan is not impacted. However, if you had borrowed at Rs 1,900 a gram and the international prices move up, say to Rs 2,100 a gram, your NBFC will inform you of the ‘increase loan eligibility’, according to Avinav Chaubey, chief marketing manager, Muthoot Finance.

What to do?
As with all loans, take a gold loan only if you are confident of your ability to pay it back in time. Otherwise, you will face charges and penal interest. Most institutions charge anywhere between two-three per cent annually, as penal interest over and above the applicable rate of interest.

Experts caution not to take this loan if it’s purely for consumption purposes such as buying a new accessory. You won’t have an asset to show at the end of your consumption or for any other purpose, which can be fulfiled by other modes of raising cash. For instance, Ankur Prasad was looking at pawning his wife’s ornaments to renovate his house. Financial experts advise against it. Prasad should rather opt for a top-up loan on his ongoing home loan, which will help him get tax benefits if used for acquiring/constructing/repairing/re-constructing the property.

Or, you can take gold loans to bridge a larger loan gap and preferably for smaller amounts as the loan tenure allowed by most banks is around a year. For example, Madhura Ganeshan opted for a loan to meet a shortfall in funds when her daughter was going abroad to study.