We often come face to face with situations when we need money for short periods, but don’t have ready cash. When such expenses can be paid by a credit card, we may do that, but often we need hard cash to meet pressing expenses such as school fees, medical bills, or other unforeseen contingencies. In such situations, the most commonly used form of credit is a personal loan. Most institutions extend a personal loan based on your credit score, income proof and assorted documentation. A personal loan works well if you can space out the repayment schedule by EMIs over 12 to 24 months. What if you require the loan for a short period, say a few days, or a couple of months only? A personal loan will simply not fit the bill.
There is one credit product which works like an overdraft account where you can borrow as and when needed, for as long as you want! You can enjoy the loan for days, months, even years, without any EMIs to honour. All you have to do is pay the interest falling due in the account regularly. It is widely used in southern India, but is yet to pick up in other parts of the country. It is the loan against gold jewellery, or gold loan. The best part about a gold loan is that there is no rigid schedule of EMIs as it comes with a bullet repayment plan. And you can close the loan even after one day, without any pre-payment penalty.
How does it work?
Consider this scenario: A borrower has to pay school fees (schools ask for annual and quarterly fee payments). One way out is to borrow to pay the fees and repay the loan over the following months on a
monthly EMI. However, in case of a gold loan, one pledges family gold jewellery with an NBFC or bank, and you get a loan after they have done the valuation. Bear in mind that for valuation, only the gold content is reckoned, not the embedded stones (precious or otherwise). After the valuation, the lender disburses the loan for 3 to 12 months for up to 75 percent of the value of gold (being the maximum loan to value or LTV ratio permitted by the RBI). The borrower will be asked to make regular interest payments and repay the full amount on or before maturity to take back the jewellery.
Now let’s say that the borrower wants to extend the loan. In such a case, the lending institution would ask you to settle the outstanding interest amount in full and, if the price of gold has fallen, pay the
difference on the initially assessed value of the gold and its current market value. If the difference is on the positive side, you become eligible for a higher loan amount too. A gold loan is available in the market at attractive rates. Various players offer rates of interest beginning as low as 12 percent per annum or 1 percent per month.
Indeed, a gold loan may well be the best loan for two kinds of borrowers — those who require funds immediately, and those who lack documentation to prove their creditworthiness. Borrowers from the
migrant, homemaker, small business owner, labourer or informal sector employee classes may not have documentary evidence of their income. They may have a regular income, it’s just that they won’t
have salary slips to prove their creditworthiness. Also, where the ticket size is small, bank officials are generally not enthusiastic, if not discouraging.
In case of a personal loan, a borrower commits himself to a minimum of 12 to 36 months of regular EMI payments. There is also a pre-payment penalty if they wish to close the loan sooner, but there is no such clause in case of gold loans.
With the advancement of digital and online technology, gold loans are now available online. An Online Gold Loan (OGL) account is one where a borrower deposits jewellery and gets online overdraft facility.
One can borrow from the overdraft account as per need and for a duration of one’s choice without even stepping into the branch. Funds get credited to bank account directly, and the borrower can repay as per convenience. The best part is that interest is charged only for the period the loan was actually availed.
Gold loans have an added attraction. They offer borrowers the opportunity to save interest. Here’s how it works. Say, borrower “A” borrows Rs 1,000 on day “T.” On day T+5 they have a surplus of Rs. 200, all of which can be transferred to the OGL account to save interest. After all, it is a 24×7 overdraft account facility which, until now, was a luxury only corporates could enjoy.
With the advent of technology, jewellery (gold) loans are filling a void in the financial services space. The ability to operating the gold loan account as an overdraft facility is a boon to small businesses, traders, vendors who now have credit access at their fingertips.
Gold loans – Step by Step Process
1) Walk into the branch of a gold loan institution (NBFC/Bank)
2) Provide KYC documents and the gold jewellery for valuation
3) After valuation, the lender would tell you the maximum loan eligibility and current schemes (most institutions offer lower interest rate for lower LTV and shorer tenure)
4) Indicate your desired loan (max up to the 75% LTV) and tenure
5) You can choose to take the loan in cash (up to a limit) or have the funds transferred to your bank account via IMPS/NEFT/RTGS.
6) Collect the collateral receipt
7) Make regular payment of the interest falling due in the account (some NBFCs offer a lower interest rate on regular repledges)
8) On maturity, settle the dues in full and take back custody of your jewellery.
9) If you wish to continue the loan, pay the interest and the revaluation difference, if any, to renew the loan account. Effectively you can extend your borrowing period indefinitely by regular payment of interest and meeting the gold revaluation difference!
(By Nandakumar, MD & CEO, Manappuram Finance Ltd)
(Disclaimer: The views expressed here are personal)