Demand for gold loans has increased significantly as gold prices rise and access to unsecured loans becomes more limited. In September, gold loans surged by an impressive 51 per cent, outpacing the 11.4 per cent growth in personal loans. Despite this surge, it’s essential to note that the gold loan market size is just 10 percent of the personal loan market, with Rs 1.47 lakh crore in gold loans compared to Rs 14.27 lakh crore in personal loans.
With the U.S. presidential election, geopolitical tensions, and conflicts in West Asia driving up gold prices, gold has become a more attractive asset, both as an investment and collateral. Gold loans are quick to process, require minimal documentation, and offer a flexible solution in uncertain economic times.
Another reason is the Reserve Bank of India (RBI) increasing risk weights on unsecured personal loans. The RBI move meant that banks and non-banking financial companies (NBFCs) had to reserve more capital against such credit card and personal loans.
However, after a spurt in the demand for gold loans, on September 30, the central bank released a notification that mentioned it has identified some concerning irregularities in the way certain supervised entities (SEs) grant loans against gold ornaments and jewelry.
These irregularities include shortcomings in using third-party agencies for sourcing and appraising loans, valuing gold without the customer being present and inadequate due diligence.
The deficiencies also include lack of transparency during auction of gold ornaments and jewelry on default by the customer, weaknesses in monitoring of loan-to-value (LTV), incorrect application of risk weights, know your customer (KYC) compliance done through fintechs rather than in-person verification and loans rolled over at the end of their tenor with only partial payment.
The central bank found this after carrying out a review of levels of adherence to prudential guidelines as well as practices being followed by SEs with regard to loans against pledged gold ornaments and jewelry.
Also Read: RBI Approved Loan Apps in India
While a gold loan lets you use your gold jewelry as collateral, offering a quick source of capital that is easy to access, here are a few key aspects for borrowers to consider before taking a gold loan.
Loan-to-Value (LTV) ratio: The Loan-to-Value (LTV) ratio for gold loans in India is a maximum of 75% as per the RBI guidelines. This means that lenders can offer up to 75% of the gold’s market value as a loan. Any offers beyond that might indicate non-compliance with regulatory standards.
Loan tenure: Shorter loan tenures tend to offer lower rates. The longer the term, the higher the rate, as it comes with added risk for the lender.
Economic conditions: Shifts in the economy, such as changes in inflation or RBI policy rates, can impact loan interest rates, as lenders adjust to market conditions.
Lender’s policies: Every lender has a unique risk management policy, which can directly influence the rate they offer on gold loans.
Also, comparing rates, fees, and penalties can have a major impact on overall repayment costs.
