Loan Against Gold - The new financial El Dorado


By

Dr. Pavnesh Kumar
Associate Professor
IILM - Academy of Higher Learning
1, Viraj Khand, Gomti Nagar, Lucknow
 


Introduction

Many people have assets such as gold ornaments and jewellery that earn no income because they lie idle at home or in a locker. If one is in need of a loan, and he/she is confident to repay the loan on time, can unlock the value of these assets by taking a loan against gold.  In the case of gold loan the lender gives  a loan against your ornaments after a quick evaluation of its purity. The lender will usually not give  the loan up to the full value of the loan, but generally one  can get up to 80% of the value.  Borrower has to pay interest on the loan. and  at  the end of the loan, after  repaying  the loan and can take gold back from the lender.

Gold loans  may be undertaken to obtain an income return on gold. The gold that is placed on loan may be either a financial asset or a non- financial asset The gold remains on the books of the gold lender, and the lender retains the exposure to the market risk arising from movements in the market price of gold. Loan against Gold Ornaments is a product designed to provide liquidity against gold ornaments without having to sell them. Gold ornaments lying idle can be put to productive use by availing Loan against Gold Ornaments. Loan will be sanctioned on submission of all the required documents and satisfactory assessment of gold ornaments. Loan amount is disbursed by cash, DD or funds transfer to an account .In the case of default in repayment, penal interest (as the case may be) will be charged around 2% per annum over and above the normal rate of interest.Gold loans are not backed by cash collateral and, in some cases, are not backed by non-cash collateral. However, the gold may be on-sold by the borrower. With Gold Loan, one  can get an instant loan against your gold jewellery and ornaments. The procedure is simple, documentation is minimal and approval is quick.

To make gold loan an attractive option companies have started packaging the loan in the following manner:-

  • Hassle-free quick processing of loans.
  • Simplified paperwork.
  • Easy payment options.
  • Attractive interest rate.

Advantages of Gold loan

Gold loan as a concept is already popular in the South India through many organized and un-organized 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.

  • Gold, unlike equity, does not earn any dividend. If  one 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  one can get the loan on the same day itself.
  • Also the interest rate one  pay on the loan is comparatively lower than a personal loan and chances of getting the loan are higher.
  • In times of emergency  one  need a loan almost immediately with minimum documentation, and without any evaluation of loan repaying capacity
  • Safety & Security of Gold Jewellery
  • Lower Interest Rates - Savings can be Invested in several Investment Avenues
  • The borrower can avail upto 90% of value.

Risk in Gold Loan:- Some thoughts

  • 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 advise to go for a small loan and for a small tenure. Only if  one can repay the loan should go for the gold loan.
  • Though gold loan lenders fall under the Reserve Bank of India's supervision, there  is  doubt whether non-banking finance companies lending against gold are as strictly regulated as banks.
  •   One should 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 pledged with the lender is usually auctioned 12 months after the due date of repayment has lapsed.
  • If  borrower  have a short-term liquidity need and is  sure of repaying the debt in time ,can count on the asset created by wife

Reasons  for growth of gold  loan companies

The steady interest rates and instant sanctions of loans, aided by the receding stigma of borrowing are driving more and more people to take this loan route.The loans-against-gold business has achieved much atttraction in recent years and players in the industry are reaping rich rewards for their efforts. It has a lot to do with the fact that more and more Indians are shedding their inhibitions about borrowing against gold and the phenomenal rise in the value of the yellow metal over the past few years that makes gold owners feel richer.

Traditionally, taking a loan against gold was thought of as a measure of last resort, when one was in dire need of emergency funds. The attitude prevented people from making good use of their  jewellery  and ornaments. However, according to gold loan companies, that notion is fast fading from the minds of the public and more people are now open to the idea of borrowing against gold. Gold finance companies are now trying to convince Indians that pledging gold is actually a smart decision and not just a last resort.
The record surge in gold prices in the past two-three years has helped create fortunes for these NBFCs. Buoyed by the high valuations on their gold holdings, Indian households, both urban and rural, are looking to raise money against them. People are now borrowing more against gold given the uncertainty in overall markets. Over the past five years, gold prices have moved to another zone altogether. Gold finance companies have found earning opportunities from this lucrative business.. Gold prices have seen 20%-25% appreciation over the past few years. Companies that are lending against gold also have a safety of margin due to this price rise.Interest rates on gold loans are competitive when compared to personal loans, since such loans are only for the short term and offer collateral for the lender.

NBFCs continue to dominate this category of lending. Manappuram Finance has nearly Rs2,600 crore as assets under management (AUM) as on March 2010 while Muthoot Finance has an asset base of around Rs9,000 crore. Manappuram is the only gold finance NBFC currently listed. These NBFCs took roots in Kerala, from where they expanded into Tamil Nadu, Andhra Pradesh and Karnataka and are now all over the country, especially eastern India. But south India continues to account for 85%-90% of the gold loan market in India.

Some prominent banks in the country have also entered the business of gold loans, though not in the same aggressive manner. Among the private banks, HDFC Bank, ICICI Bank and Lakshmi Vilas Bank have an exposure to gold loans. Among the government banks, Central Bank of India, Indian Overseas Bank, Development Credit Bank, State Bank of Indore, State Bank of Hyderabad and Syndicate Bank are prominent players. Organised lenders like banks and NBFCs still have a long way to go before they break ground against the local moneylenders and pawnbrokers who still hold sway in local markets. Consider this: the unorganised sector still accounts for 75% of the overall gold loan market in India, while the rural population holds over 60% of the country's gold stockpile. So, although India as a whole currently holds around 15,000 tonnes of gold, a sizeable chunk of it remains out of the domain of the organized sector, which can otherwise bring it into the mainstream financial system.

Challenges before gold loan companies

The cost of bank funding to the thriving gold loan segment has increased by 150-200 basis points following the Reserve Bank of India decision to remove the priority sector lending benefit available to commercial banks, under the agriculture classification, for loans to gold loan companies like Manappuram and Muthoot.The removal of the priority sector benefit will marginally diminish the attractiveness for banks to lend to this sector. This will lead to an increase in the gold loan players' borrowing costs by 150 to 200 basis points, and reduce growth rates in their portfolios to less than 50 % annually, over the medium term."The increase in the cost of funds is likely to be passed on to customers by gold loan companies. The explosive growth of the gold loan segment will also come down following the RBI measure," said a banking source. Till recently, most of the bank loans and assignment transactions of gold loan companies qualified for the priority sector lending benefit. Therefore, these entities have tended to rely heavily on bank funding loans from, and portfolio assignments to, banks constituted nearly 75 % of these entities' aggregate borrowings as on September 30, 2010. The priority sector lending benefit has also helped gold loan companies maintain a low cost of borrowings from banks, at 8.0 to 10.5 %.The credit risk profiles of the gold loan players will, nevertheless, continue to be supported by their stable asset quality, comfortable capitalization, and established track record

Conclusions

In the years to come we will see that the loan against gold will become a lucrative  options to borrow funds from the market. We are observing exponential growth of this sector.It is the need of the hour that the regulator as well as companies should allocate funds to make public aware for this option

References.

http://www.anz.com
http://www.indianmoney.com
http://business.rediff.com
http://articles.economictimes.indiatimes.com/2011-03-18/news
http://www.expressindia.com
http://www.articlesbase.com
 


Dr. Pavnesh Kumar
Associate Professor
IILM - Academy of Higher Learning
1, Viraj Khand, Gomti Nagar, Lucknow
 

Source: E-mail April 5, 2011

          

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