How to Make Sense of the Indian Economy: The Gold Loan Primer

India is one of the Largest Gold Markets in the World, with growing affluence strongly driving demand. Every 1% increase in an Indian household’s income results in a 1% increase in their Gold demand, as per a World Gold Council (WGC) report.

 

Gold has a central role to play in our culture, as a store of value, a symbol of wealth and status and a fundamental part of many rituals, making it a very popular investment. In a WGC survey, one-third of all respondents (Indians, aged between 18–33) said they would invest in Gold if they're handed out INR50,000. No wonder banks have capitalized on this fascination and accordingly structured various lending products.

 

What?

 

The Gold Loan is a product which can help you fund a personal finance requirement by securing one’s Gold ornaments or jewellery. With Gold acting as a collateral, the loan amount depends on the amount pledged. The personal finance requirement can range from education, a vacation, to a medical emergency. The use of funds is not a factor driving the sanction of funds.

 

How?

 

Maximum loan amount sanctioned depends on the amount of Gold pledged. RBI restricts banks from advancing loans crossing 75% of the Gold value pledged (i.e. loan-to-value ratio).

 

Absolute amounts, in general, can range between INR1,500 to INR1cr, depending on the eligibility criteria of the concerned bank.

 

RBI has also put in place guidelines to standardize the valuation methodology adopted by a bank while valuing the pledged Gold.

 

Valuation is driven by the average closing price of 22 carat Gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd. (or the historical spot Gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission). If purity is less than 22 carats, the pledged amount in grams should be adjusted pro rata.

 

The maximum allowable duration for repayment (“loan period”) cannot exceed 12 months.

 

Repayment can be structured via:

 

  • Equated Monthly Instalments (EMIs)
  • Upfront payment of interest with repayment of principal upon end of loan period
  • Payment of interest monthly with repayment of principal upon end of loan period

 

An EMI plan essentially spreads the total principal and interest due equally over the loan period and is chargeable on a monthly-basis.

 

Interest Rate?

 

Like car, home and education loans, the EMI is calculated based on the principal to be borrowed, the applicable interest rate, and the loan period. The applicable interest rate is set by the bank.

 

Other Charges?

 

There is usually some processing fee (in general not exceeding 1% of the loan amount), late payment charges, valuation fees (for determining the value of the underlying collateral) etc. for Gold Loans. You can check an online loan marketplace to get a sense of the applicable interest rates and processing fees. They are usually expressed on an annualized basis.

 

Things to Watch

 

  1. Normally, shorter is the loan period, lower would be the interest rate applicable
  2. In most cases, a pre-payment charge is omitted
  3. Gold Loan is ideal for fast and low documentation financing
  4. The lending institution will usually not lend the 100% of the Gold value
  5. A Gold Loan is one of the few products where the borrower’s credit score is not given much importance. Nevertheless, proper repayment of a Gold Loan does contribute to one’s credit score.

 

This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”.

 

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