What's next for gold borrowers?

As RBI curbs lending against various forms of gold holdings, it's gotten a tad harder to raise loans against your gold. Here's a lowdown

 

Gold is a valuable resource to raise last-minute funds. However, if you have thought that the safe-haven metal will hold good to raise funds against it, think again. For now, it has become difficult to raise resources against your gold holdings for a slew of reasons. First, the Reserve Bank of India (RBI) has imposed restrictions on gold imports and barred banks from bulk purchasing gold. Second, it has restricted banks from lending against gold to less than 50g per person, and completely barred financiers from lending against gold mutual funds and exchange traded funds.

To make matters worse, gold prices have dipped 13 per cent this year. That means existing borrowers would have to pay up more collateral and dip into their savings and newer borrowers will have to contend with a lot less in loan value.

Usually, non-banking finance companies extending gold loans like Muthoot Finance and Mannapuram Finance offer a loan-to-value (LTV) ratio of 60 per cent, while banks offer 70 to 85 per cent. Also, banks can give longer-term loans. LTV ratio refers to the amount of loan you can get on keeping gold as security.

When these limits are breached, gold borrowers can lose a little more. Says a general manager of Bank of Baroda: “One disadvantage of a gold loan is that if prices fall, the borrower has to either to make up for the fall by paying up that much or he/she has to bring in additional gold jewellery to match the fall in price.” You may want to re-consider your gold funding and look for alternatives if the demand is high.

New borrowers will have to contend with lesser loans as gold financiers also cushion themselves against a further fall. Due to pledging and other costs, your loan value could dip as much as 20 per cent. I Unnikrishnan, managing director of Manappuram Finance, says there has been no impact on the number of borrowers coming to his company, as of now. “India has a ready market for gold. Even in the late 1990s, when gold prices fell to $230-240 level, there was no impact on the liquidity of gold,” he says. Manappuram Finance is offering loan against gold jewellery at 22 per cent. The rates are much lower for banks at 14-15 per cent. Buyers largely use gold in the form of coins and bars more to pledge as collateral, for jewellery has a lot of sentimental value and households are uneasy to part with it. RBI’s regulations now restrict loan funding to less than 50g per customer.

Under such circumstances, unless you are in need of immediate funds, it’s best to look at other cheaper resource-raising alternatives. Taking into account the present value of gold per gram and the margin requirements, you will have to look for other modes of raising funds such as a personal loan, loan against assets like property or fixed deposit.

Financial experts suggest opting for loan against fixed deposit for short-term needs. Even loan against insurance can be used. However, if the fund requirement is large, loan against property would work out cheaper.  Gold loans should be the last resort as these are expensive and for a shorter term (usually one year). But most prefer this because it is easily available.

Loan against shares are not encouraged dues to share price volatility. Most banks offer 50 per cent of the value in case of loan against shares.