Recently, the Reserve Bank of India (RBI) had finally given a level playing field to financial companies to offer loans against gold. These include the different banks in the country as well as NFBCs – Non-Banking Financial Companies.
In fact, it has been estimated that 10 percent of the country’s gold stock is pledged as collateral for loans. Out of this, 75 percent is in the unorganized market (pawn broker, money lenders, etc.) and the remaining 25 percent in the organised market. This is inclusive of specialized Non-Banking Finance Companies (NBFCs), other NBFCs, commercial and cooperative banks, etc.
Many people who seek this financing option often face the doubt of opting either for banks or for an NFBC. To make this comparison easier, it is important to consider certain key factors such as interest rates and processing fees.
Opted only if a person requires emergency funds, there are plenty of gold loan products that are available in the market. One of these, a term loan is easy to avail by simply pledging the gold and borrowing the money. There is also the overdraft facility which is also offered. These loans are especially common amongst the people who live in the rural, agrarian society where there are fluctuations in their levels of income. The bulk of their earnings usually come only during the two harvest seasons. Therefore, these loans become of high importance to these people.
These are extremely useful financing options for people residing in urban areas, in case they urgently require funds; or want to make use of the gold ornaments which are lying idle in their house. While the interest rate for banks usually is within the range of 12-16%; for NFBCs it is between the ranges of 14-26%. The additional costs, such as the processing fees are often between the ranges of 0.025-1.5% of the loan amount. It is very easy to apply for these loans online or by visiting the bank branch to manually apply for the same.
This year, at the end of January, 2014 the Central Bank of India had issued a circular which stated that it had decided to prescribe a loan-to-value (LTV) ratio that would not exceed 75 percent for the banks which lent against gold jewellery. The formalities that are associated with obtaining a gold loan are minimal and the procedure for the same is very simple. The underlying asset in gold loans is not subject to any form of depreciation.
In short, they are extremely suitable for those people who are employed in the unorganized and informal sector