For new borrowers, the lender – be it a bank or a financial institution – arrives at a standard gold value by tracing the gold rate fluctuations over the period of one month or by analyzing the current or moving average price.
There has been a sharp rise in the number of people demanding gold loans during the pandemic. As economic activities have shrunk, borrowers are turning to pledge their gold to avail credit and meet their medical and other financial needs.
Besides this, Ankur Gupta, Founder and CEO, Ruptok Fintech, says, “gold loans are also preferred due to the involvement of less paperwork, availability of flexible schemes and quick disbursements of the loan amount.” Gold loan is an accessible and hassle-free option for borrowers, particularly for those going for small loans with low-ticket sizes.
While opting for a gold loan, one of the key determinants is its Loan to Value (LTV). Capped at 75 per cent by the Reserve Bank of India (RBI), LTV is the ratio of the loan amount to the gold being pledged. Gupta adds, “LTV is inversely proportional with the ongoing market rate of gold. In cases where the rate of gold rises, the amount available for people to borrow increases. On the other hand, when the price of gold falls, borrowers have to pledge additional gold for the same loan amount.”
For new borrowers, the lender – be it a bank or a financial institution – arrives at a standard gold value by tracing the gold rate fluctuations over the period of one month or by analyzing the current or moving average price. A loan to value is then evaluated for the borrower by checking the purity of the gold being pledged. Gupta adds, “The traditional way to do so is by using nitric acid and stone (24k, 22k, 20k). Most banks use a professional loan evaluator for the same.”
Additionally, lenders at times also ask for a pre-payment for the existing loan amount, in cases, the rate of gold marginally fluctuates during an ongoing or existing gold loan. Experts say this is because gold loan lenders usually lend upto 75 per cent of the total gold value and in cases of falling prices, this value becomes 80 to 85 per cent.
Gupta says, “This is not a favourable situation for lenders to be in and therefore, this is the stage where lenders ask borrowers to either pledge more gold or pay the marginal difference amount. If borrowers do not do this, financial institutions consider the customer as a defaulter which has a direct impact on the borrower’s credit score.”
Note that, in cases where the default goes upto 90 days, lenders have the option of liquidating the borrower’s gold by auctioning it. However, industry experts say for most lenders, auctioning the gold is not a primary route to follow, particularly if the loan is for a shorter tenure or for a small ticket size.