The spread of coronavirus pandemic across the world has resulted in financial constraints for a large number of people. Many lost their jobs and businesses, and to fulfill the urgent fund requirements, most people opted for a gold loan due to the less paperwork required for it. Gold loans are credit that a person gets from a financial institution in lieu of gold assets for a tenure of up to one year as these are short-term secured loans. The increase and decrease of the LTV ratio on gold loans over time had a great impact on the financial market. The gold loan has always been the priority at times of quick cash requirements as the dispersal time taken for these loans is lesser than other personal loans.
According to the protocols given by the Reserve Bank of India, the gold loan LTV ratio must not surpass 75 percent of the value of gold jewelry or articles pledged against the gold loan. But after the LTV ratio has been improved, the applicants became eligible for a higher amount of loan for the exact value of gold; but it may rebound if the gold prices decrease from the existing levels. If the minimum margin requirement is 10% now, then the Bank furnishing the gold loan may want the borrower to make the margin maintenance good by expensing the additional amount.
The recent variation of gold rates has drastically influenced the portfolio level loan-to-value for gold loan majors, which is almost 60%.The incline of loan-to-value favors the organized lenders and rejects the popular NBFC adversaries to give them a valid chance. This exclusion of NBFCs from the improved loan to value may limit their business possibilities and will definitely impact their marginal borrowers.
Finance Industry Development Council or FIDC has pleaded to rethink the judgment on barring of the NBFCs from the improved loan to value ratio for loans pledged against gold ornaments used for the non-agricultural purposes, to the regulatory body MPC, by a letter to the RBI Governor. NBFCs normally cover the regions where Banks do not clasp their dominance and secured loans like gold loans that the NBFCs provide reach to a great expanse of masses. So, the loan to value ratio of 75% that is still applied to the NBFCs might influence the financial market drastically.
After the price of gold has corrected by more than 20% from its peak, it now costs around Rs 46000 per 10 grams of gold. This has also affected the LTV ratio, which basically means that for collateral worth Rs 10,000, a loan provided by a bank or NBFC will be only 75% of its value which is Rs 7500 only. Currently, banks can lend up to 75% of the value of gold ornaments; but when the monetary policy outcome came out, the Central Bank increased the loan to value ratio for gold loans up to 90% of the proportion of collateral value that the lender can finance through a gold loan for non-agricultural purposes.
Though NBFCs were not allowed to avail these relaxed LTV norms applicable for new loans, the banks performed better liquidity to cash-strapped borrowers who availed Gold Loans after the relaxation was available till 31st March 2021. The motive of this relaxed loan-to-value norm is to provide support to people in managing their economic liabilities during the time of pandemics.
The RBI Governor, while notifying the decision taken by the Monetary Policy Committee of Central Bank, stated that to mitigate the impact of covid-19 on households, the increase of permissible loan to value ratio has been allowed. The gold loan demand has surged significantly as more borrowers are taking it after the pandemic set in.
There are many Banks and NBFCs which lend different schemes and Gold Loan interest rates for their customers. Some of them are listed below.
1. SBI Gold Loan
State Bank of India is popular for the rate of interest it offers to its customers. The agricultural gold loan interest rate given by this Bank is 7.5 percent, and for other gold loans, the percentage varies on the LTV ratio. The processing fee is 0.5 percent of the loan amount, and the minimum processing fee is Rs. 500.
2. Canara Bank Gold Loan
Canara Bank gives gold loans at the interest rate of 7.35 percent onwards for the period of 6-12 months. The gold loan interest rate depends upon the quality and purity of gold, the loan amount applied for, and the period of repayment.
3. Oriental Bank of Commerce Gold loan
The Bank offers its clients low gold loan interest percentages for or both former and recent customers, which is 7 percent. The processing fee is just 1 per cent or Rs 1000, whichever is lower. The loan repayment time may extend to 12 months.
4. Punjab National Bank Gold Loan
Punjab National Bank provides loans for both existing and fresh borrowers at the same rate of interest for gold loans that is 8.75 percent. The processing fees of Punjab National Bank Gold Loan are 0.7 per cent of the loan amount borrowed with some additional taxes. The loan repayment period can extend from 1 month to 1 year.
Currently, the demand for a gold loan has increased, and banks and other Financial Institutions are reaching out to existing and prospective customers with gold loan propositions. Moreover, the rise in domestic as well as the international price of gold has also increased the demand for gold loans as the borrowers can get higher loan amounts against the same quantity of gold. The gold prices have hiked 30% since April 2021 and stand at Rs 55,448 for 10 grams of gold of 999 purity as per the report of the Indian Bullion Jewellers Association.
Presently the non-bank financiers and unorganized lenders like local pawnbrokers and Jewellers have a wider network and thereby enjoy a large market share in gold loans. But after the announcement of the improved loan to value ratio for the banks, they are now bound to garner a large market share against their non-banking years in gold loans in the financial year 2021.
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