Gold Loan in India

Gold is one of the most auspicious metals in Indian culture, so much so, Hindus celebrate a specific event, known as Dhanteras, every year just before the Diwali celebrations. Thankfully, India possesses sufficient gold to satiate the immense demand for this valuable metal. In 2019, the country’s estimated gold reserve was around 600 metric tons, as per Statista.

Gold is also one of the primary components, driving the jewellery market in the nation. As per recent estimates, the jewellery sector would contribute around Rs.6 billion to India’s GDP by 2021. Still, because of its auspiciousness, the country’s households treat gold as an idle asset.

How Much Gold Do Indians Own?

While it is next to impossible to calculate the exact gold ownership among Indian families, estimates suggest, it is around 25000 tons. This colossal amount of the yellow metal is merely sitting inside safes and lockers, rather than circulating in the Indian economy. Even a small portion of this Rs. 110 lakh crore asset injection into the national economy can boost the GDP significantly.

While selling this gold is one way to go about it, another option would be collateralising the same to avail a gold loan.

What Is A Gold Loan?

A gold loan is a loan against one’s owned gold. Individuals need to pledge their gold ornaments to a non-banking financial institution, based on which the NBFC would extend funds to the owner. In most cases, borrowers would acquire only a certain percentage of the gold’s worth, known as the loan-to-value (LTV).

• Previously, the Reserve Bank of India capped LTV to 75% for gold loans.
• However, presently, individuals can opt for principals of up to 90% of the gold value. This exception is valid on gold loans taken on or before March 31, 2021, as per an RBI notification.

For instance, if your pledged gold is worth Rs. 1 lakh as per current market rate, you can seek finance up to Rs.90000. Borrowers must understand that LTV for gold loans can be lower than 90% but never higher.

Eligibility Criteria For Gold Loans

Gold loans can be the ideal financing option for individuals who do not qualify for typical loan options. To avail such loans, you need to be 18 years or older. Additionally, you would need to own gold items or ornaments of the recommended purity. Thus, you do not need to pass credit score checks or additional criteria to become eligible for these loans.

The underlying security, i.e. the gold, mitigates risk for lenders, thereby allowing for relaxed eligibility norms. If borrowers fail to repay the dues within the pre-determined tenure, financial institutions are well within their rights to sell the pledged asset to recover any losses.

What Type Of Gold Is Eligible As Collateral?

While most lenders allow individuals to pledge any of their gold items, they still need to fulfil some basic guidelines. For instance, the item in question should have a purity level of 18-karat or more. Furthermore, reputed companies restrict hypothecation to gold jewellery items only. Therefore, you may not be able to pledge gold coins or bars.

Documents Necessary For Gold Loan Application

Even though exact documentation process can differ among the various lenders, listed below are some of the paperwork a potential borrower would need to submit –

1. KYC documents – Aadhaar card, PAN card, Voter ID, driving license, passport and others
2. Address proof – Aadhaar card, voter ID, passport, driving license, utility bills, etc.

To know if additional documents are necessary, a borrower should inquire about the same while searching for ‘gold loan providers near me’.

Features And Benefits Of Gold Loans

The following are some of the reasons why gold loans have achieved such popularity lately –

• Speedy Approvals And Disbursals

Instead of spending days or weeks waiting for the loan proceeds to reach one’s bank account, gold loan borrowers can often acquire the funds within just a few hours after approval. Thus, this form of credit is apt for funding emergency expenses, such as medical bills, sudden business shortfalls and more.

Besides the disbursal process, the simple and convenient application procedure also helps. Most lenders offer an online process, thereby reducing time consumption significantly.

• Doorstep Facility Available

Whether an individual is opting for big-ticket or small-ticket gold loans, doorstep credit facility can significantly enhance convenience. After application, a representative from the lending institution visits the borrower’s home to measure and collect the gold, along with necessary documentation.

The gold loan principal is electronically transferred to the individual’s account within a few minutes, after which this representative will safely carry the pledged gold for storage. This entire process eliminates the need for the debtor to take time out from his/her schedule to visit the offices of a gold loan provider.

• Affordable Interest Rates

As explained before, the underlying security decreases the overall risk for lending institutions. Due to the minimal risk profile, lenders can afford to provide such loans without charging a hefty interest. These minimal rates ensure convenience and affordability. Also, servicing smaller EMIs due to the lower interest rates prevents unnecessary financial burden on borrowers.

• Unimpressive Credit Score is Not a Hindrance

Individuals often face credit application rejection due to lack of proper credit history and scores. One would need to have 750 or more scores to acquire most unsecured loans in the market. As per a TransUnion CIBIL report, 79% of loans are sanctioned to individuals with a significant credit rating or score.   

Thankfully, gold loans are not locked behind such restrictions. In most cases, NBFCs providing such credits do not even check your CIBIL, thereby enabling people without a spotless credit history to acquire hassle-free advances.

• Immense Flexibility of Repayment

Most loans require borrowers to service equated monthly instalments during the repayment tenure. However, for gold loans, an individual can choose to forego such EMIs.

Bullet gold loan repayment is a process where a borrower can decide to pay off the principal and interest outstanding through a lump sum payment at the end of the loan tenure. Picking this option ensures that individuals do not have to service liabilities each month.

Another option is to pay the total interest due on such a loan through monthly instalments while clearing the entire principal repayment amount through a lump sum payment at the end of the gold loan tenure.

These options prove highly beneficial, allowing the maximum number of individuals to avail gold loans without overstraining their monthly budget.

• No Pre-closure Charges

Reputed lenders do not charge any penalties if a borrower decides to close his/her existing gold loan dues before the tenure ends. Therefore, if you happen to acquire a substantial quantum of funds at some point during repayment, you can utilise this sum to repay the outstanding principal. Doing so can help you save on interest payments.

Similarly, part prepaying such a loan does not attract any additional charges. Borrowers who can afford to make these extra payments can decrease their interest burden by reducing the overall principal outstanding.

This is especially beneficial for business borrowers, who still need to bear prepayment or foreclosure charges on their credits. The RBI abolished such penalties on loans to individuals through an August 2019 directive.

• Income Does Not Matter

Most other loans require borrowers to declare his/her monthly income, as well as submit documentation to support the same. For instance, salaried individuals need to provide photocopies of their payslips, while self-employed people may need to provide bank statements, Profit & Loss statements and much more.

Thankfully, gold loan takers do not need to provide any such supporting documents. In most cases, NBFCs do not even ask you about your income when applying for such advances. Even retired individuals relying on a pension or returns from investments can opt for a gold loan without facing any complication.

• Safe Storage Of Pledged Gold

One of the biggest concerns regarding collateralising gold is its safety for the duration of this loan tenure. Most gold loan providers ensure complete security for this asset, taking the utmost care to return your possession to you after credit repayment.

Some companies even go so far as to provide insurance policies to customers, covering financial costs should the yellow metal in question be lost, stolen, or damaged while it is with the financial institution.

Even so, know that your hypothecated asset is stored safely inside bank vaults for safekeeping.

These reasons and more are responsible for the immense predicted growth of gold loans in the country. The World Gold Council claims in a report that this particular loan segment is worth around Rs. 3.44 lakh crores in FY2020. However, it is estimated to maintain an impressive annual growth rate of 15.7% in the next two years, reaching Rs.4.61 lakh crore by FY22.

Three Distinct Repayment Methods For Gold Loans

Borrowers can choose one of the following repayment options to service their dues besides traditional EMIs.

• Interest Payment – In this particular option, an individual would need to service the interest portion of his dues every month. However, he can delay the principal repayment to the end of his gold loan tenure.
• Bullet Repayment – Here, both the interest and principal repayment is shifted to the tenure’s end. Thus, if your gold loan tenure is 1 year, you do not need to service your dues every month. Instead, you can repay using a lump-sum payment on the 12^th month or upon tenure completion.
• Part Payment – In part payment option, you can service the debt using regular EMIs. However, if you choose to prepay a sum, it would be deducted from your principal outstanding. Reduction in principal outstanding also leads to lower interest payments.

You can choose whichever of these options suit you well. However, make sure to pick the pertinent plan while availing this gold loan, as changing repayment modes midway through one’s tenure is impossible.

How To Apply For A Gold Loan?

Gold loan online application process has ensured simplicity and minimised hassle. Here is a detailed procedure for application –

• Step 1: Visit the NBFC’s website and choose your city of residence.
• Step 2: Fill up an online application form, providing details, such as name, age, address, contact number and more.
• Step 3: After entering these details, click on apply.
• Step 4: Loan managers will reach your home to assess and weigh the pledged gold items.
• Step 5: After this measurement and other formalities are complete, loan managers will sanction the proceeds. He/she will leave with the collateralised gold only after this principal sum reaches your account.

This concludes the online gold application procedure. The entire process is fast and ensures the utmost convenience for borrowers. An individual opting for such a loan does not need to travel with the concerned jewellery, which guarantees security for the underlying assets.

Steps To Follow To Repay Gold Loan

Repaying one’s gold loan is just as simple as availing this line of credit. Once again, an individual can repay such dues online using the concerned financier’s website or mobile application.

• Step 1: Visit the login page and enter the registered mobile number.
• Step 2: Look for the OTP on this number and use it to verify identity.
• Step 3: The following page lists all relevant information regarding one’s gold loan online, such as weightage of the pledged asset, loan start date, the total amount due, interest due and more. Here, look for a payment option and click on it.
• Step 4: Pay the concerned liabilities using internet banking, UPI, RTGS, IMPS or debit cards.

Why Are Gold Loans A Popular Source of Funding for Small Businesses?

India’s micro, small and medium enterprises employ nearly 120 million individuals presently, according to an IBEF report. This sector is also a major contributor to India’s GDP. Even so, it lacks the kind of financial backing that traditional, large-scale corporations enjoy. Business loans have stringent eligibility norms, which disqualify these smaller organisations from capitalising on financial aid.

Gold loans can be an alternative to these standard financial sources. The MSME sector can rely on these secured lines of credit to achieve their goals. Even the smallest of operations can qualify for a gold loan, provided they have the necessary asset to collateralise. Listed below are some business ideas, where one can seek funding through gold loans but never through mainstream business finance.

• Homemade Food Delivery Business

Some businesses thrive when operating on the smallest scale. A food delivery service, for instance, may rely on 20-30 regular customers. The food is cooked in a home kitchen without specialised or advanced equipment. The delivery itself may take place using the entrepreneur’s private car or two-wheeler. A gold loan can help expand such a business, enabling owners to service a wider area or invest in marketing to grow its client base.

• Hand-made Jewellery Business

Handcrafted jewellery is in significant demand, but only a few designers have the financial backing to establish an outlet or shop. Others may design and sell their pieces through online mediums. While most lenders may decline business loan applications to pursue such enterprises, gold lenders can fulfil your requirements. With proper financing, an aspiring jewel designer can launch several outlets throughout the country.

• Sudden Accidental Loss of Inventory

Suppose a fire breaks out in your textile showroom, leaving your entire inventory in tatters. Normally, this would result in immense losses, which you would need to bear out of your own pocket. Cash shortfalls can increase your challenge further at such times.

Fortunately, gold loans offer a quick way out from these kinds of fixes. The substantial cash injection at nominal rates, enable you to withstand such unfortunate incidents without needing to cease operations completely.     

• Photography

Photographers are talented individuals, who unfortunately face a tough time while starting. The costly camera equipment can be challenging to acquire, without proper access to finance. Business lenders perceive photographers as risky applicants and do not entertain advance requests from them.

According to an April 2020 report, gold loans are growing faster than all other retail-lending products. The simplicity of application and its myriads of helpful features are quickly changing Indians’ perception of these lines of credit. Since most Indian households are home to gold ornaments and jewellery, this growth in gold loan numbers is expected to continue for some time to come.

Frequently Asked Questions

1. What is the process of loan approval for gold loans?

After online application, a loan manager will arrive at the borrower’s residence to evaluate the gold’s purity and weight in question. This manager will use specialised equipment to gauge the gold quality on the spot and conduct other formalities. Next, based on his assessment, borrowers would acquire a certain amount in their accounts.

2. How is the weight of pledged jewellery calculated?

The lending institution weighs the gold and measures its purity using specialised equipment. It disburses funds based on the market value of gold on the date of a gold loan application. Keep in mind that only the gold portion of pledged jewellery is measured and not the other materials’ weight.

3. Can gold loan repayment affect CIBIL scores?

Gold loan repayment, like any other credit repayment, influences a borrower’s CIBIL score. Individuals who can service EMIs related to such loans on time enjoy a boost in credit scores. However, failure to stick to the repayment schedule can lead to a downgrade of these scores, severely restricting your ability to acquire loans in the future.

4. How can borrowers verify the identity of loan managers?

In case of gold loans, a loan manager performs the crucial function of transporting the pledged asset from an individual’s home to bank safes. Thus, verifying their identity is vital. Borrowers can check the identity card of this loan manager. Additionally, once this representative reaches their home, borrowers can share a unique OTP with him, which he will need to proceed with formalities.