Among the many asset classes, gold remains a safe bet for investors, especially during the period of uncertainty in both domestic and international markets.
Possessing gold has been an age-old tradition of the Indian culture, be it buying the yellow metal in the form of a jewellery during marriages, thread ceremonies, etc., or at a few auspicious occasions like Dussehra, Dhanteras and Akshaya Tritiya. For a majority of Indians, it’s customary to buy gold as it brings in prosperity to the family throughout the year. Not just that, even in the bullion market, gold prices continue to stay upbeat and are hovering over Rs 40,000 per 10 grams.
Among the many asset classes, gold remains a safe bet for investors, especially during the period of uncertainty in both domestic and international markets. In fact, industry experts believe that inflation risks and sluggish economic growth could push gold prices higher by another 10% from the current levels in the domestic market in 2020.
According to a KPMG report, the value of organised gold loan market in India will grow to Rs 3,10,100 crore by 2020 at a three-year compounded annual growth rate (CAGR) of 13.7%. India is one of the largest consumers of gold with an estimated stock of 23,000 tonnes.
Along with rising gold prices, India’s gold loan market too has witnessed strong growth over the past few years. Compared to home and personal loans, people borrow money for their short-term requirements by mortgaging gold at banks or with village lenders. Several banks and specialised players in the gold loan segment compete with these unorganised players in small towns and villages. Gold loans are available at a lower interest rate when compared to personal loans and you get multiple repayment options. About 40% of the gold loan market is in South India.
Interest rate on gold loan varies from bank to bank. RBI has allowed LTV ratio of up to 75%, which means a customer can take loan up to 75% of the value of the gold mortgaged. Depending on the financial institution, gold loan interest rates vary between 9% and 25%. Some banks in India disburse gold loans up to Rs 20 lakh at an attractive rate of interest with zero processing fee, quick approvals and personalised service. Such is the demand for gold loans that more banks are looking to expand in this segment in the coming period.
Before taking a gold loan, it is advisable to compare rates of different banks for a particular LTV ratio. Also, several banks charge a processing fee on gold loans that varies between 0.20 and 2%. As processing fees can be a significant amount, especially for big ticket gold loans, one should look for banks that waive off processing fees during their promotional offer.
With regards to pre-payment charges, some banks charge up to 2% of the outstanding loan amount if a customer decides to pre-close the loans before the completion of six months. Hence, opt for a lender that do not impose pre-payment penalty on the pre closure. Also, a gold loan seeker should opt for the repayment option that suits him the best. Several lenders offer flexible repayment option that includes EMI mode, upfront interest payment option, bullet repayment of principal. Some lenders also allow only interest payment at the beginning of every month and principal repayment at maturity.
As Solomon once said, knowledge is indeed of more value than gold – especially if the same helps one to extract more from the asset when it is needed the most.
(By Sanjay Rajoria, DGM–Retail Distribution, SVC Co-operative Bank Ltd)