Keep loan-to-value ratio for gold below 75% to avoid topping up collateral

Despite the Reserve Bank of India’s (RBI) directive in May 2024 limiting cash disbursements to Rs 20,000, the popularity of gold loans remains undiminished, according to rating agency CRISIL. In June, gold loan disbursements grew by 12 per cent. The assets under management (AUM) of Muthoot Finance, the largest player, grew by 28 per cent in the first quarter of financial year 2024-25. What accounts for borrowers’ enthusiasm for these loans?

“Borrowers find it more convenient than other forms of credit,” says Shaji Varghese, chief executive officer (CEO), Muthoot FinCorp.

Low-cost and easy to access

Borrowers favour gold loans due to their lower interest rates, minimal documentation, and quick processing. These secured loans against gold or jewellery are particularly useful for meeting short-term financial needs, especially during emergencies. While gold loan interest rates range from 8.8 per cent to 19 per cent, unsecured personal loans can charge between 9 per cent and 45 per cent.

Only address and identity proofs are required for gold loans. Furnishing proof of income is not required. Lenders follow RBI guidelines and verify borrowers’ Know Your Customer (KYC) details.

 

The processing time is short. The only time-consuming part is the physical validation of the quantity and purity of the gold provided as collateral. Once that is done, the turnaround time is a few hours.

According to RBI guidelines, the loan-to-value (LTV) ratio cannot exceed 75 per cent. This implies that if the gold is valued at Rs 100, the upper limit for the loan is Rs 75. “At lenders’ portfolio level, the LTV is much lower — around 63-65 per cent,” says Varghese.

Most NBFCs charge a processing fee between 0.25 per cent and 2 per cent of the loan amount. Some charge a fixed sum, while others waive it. Loan tenures vary between 3 months and 5 years. Some lenders offer full or partial prepayment without penalties.

“Some lenders allow repayment of both principal and interest at the end of the loan tenure. Others offer loans as overdraft facility, which makes them a good option for those seeking to manage short-term fund shortages,” says Sahil Arora, chief business officer (secured loans), Paisabazaar.

Compare rates and tenures

Before taking a loan, check the lender’s reputation, especially its expertise in gold loans. Varghese feels that if gold loan disbursal is part of a lender’s core business, it will customise and personalise choices for each borrower, and offer superior services.

Compare interest rates and loan tenures of various players. Also, find out the lender’s policy related to insurance of the mortgaged gold and whether it is stored securely.

Avoid overleveraging

Only borrow an amount that can be repaid comfortably. The ratio of total EMI to take-home salary should not exceed 40 per cent.

“Assess carefully if a loan is better than selling the gold to fulfil one’s obligations. Selling can be an emotional decision, but it may sometimes be wiser due to the high interest and repayment terms of a loan,” says Mohit Gang, co-founder and CEO, MoneyFront.

Post budget 2024, which reduced the customs duty on gold, prices fell and then recovered. “If the LTV ratio of an existing gold loan exceeds the cap of 75 per cent due to a sharp fall in domestic gold prices, lenders can ask borrowers to pledge more gold or deposit cash to bring the ratio within the limit. If borrowers fail, lenders can sell their gold,” says Arora.