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Mumbai resident Akhila Swamy (name changed on request) needs Rs 3.50 lakh. She had planned to raise the funds against her gold holding, which she rarely uses. Once earlier when she had a similar requirement she had borrowed against the same.
But, some friends have advised Swamy against it given that the Reserve Bank of India (RBI) has been tightening lending norms against gold jewellery.
“I have gold coins also which I had pledged last time. And I was able to secure as much as 80% of the value of gold. But, this time when I enquired over the phone two companies told me that I would get only up to 60% of the value of gold sans gold coins. If I leave out coins I may not be able to raise as much as I want,” Swamy complains.
In a latest notification the RBI has reiterated that the loan-to-value (LTV) ratio for loans against jewellery should be 60%. The apex bank has also asked for the value of gold jewellery to be standardised.
The collateral should be valued at the average of the closing price of 22 carat gold for the preceding 30 days quoted by The Bombay Bullion Association (BBA). If the gold is of purity less than 22 carats, the non-banking financial company (NBFC) -- Muthoot Finance and Mannapuram Finance -- should translate the collateral into 22 carat and state the exact grams of the collateral and value the gold proportionately.
In its report, rating agency Crisil said that the introduction of uniform valuation methodology for jewellery will limit the flexibility to offer loans at higher effective LTV. LTV is decided only after deducting 10 to 15% of the value of gold as jewellery making charges. LTV ratio refers to the amount of loan you can get on keeping gold as security.
While the latest norms will make the system prudent, the central bank has earlier (this year) imposed restrictions making it difficult to raise resources against gold.
First, the RBI imposed restrictions on gold imports and barred banks from bulk purchasing gold. Secondly, it restricted banks from lending against gold to less than 50 gram per person, and completely barred financiers from lending against gold mutual funds and exchange-traded funds.
To make matters worse, gold prices have fallen over seven% in the last one year. That means existing borrowers would have to pay up more collateral. And newer borrowers will have to contend with a lot less in loan value.
Says a general manager of State Bank of India, “Gold loans are a good last-minute borrowing option but given the gold price movement these days it may not be very lucrative option these days. Because if prices fall, the borrower has to either to make up for the fall in prices by paying up that much or he/she has to bring in additional gold jewellery to match the fall in price.”
RBI has also asked gold loan NBFCs to have appropriate infrastructure to store gold. NBFCs have been asked to have Board approved policies on auction of gold jewellery that are transparent to the borrower and adequate prior notice has been issued to him / her.
“These processes will lead to a higher compliance cost for us,” says a senior executive at a gold loan NBFC. “And we will have to pass it on as we are likely to lose customers to banks and take a hit on our margins,” he adds.
Pawan Agrawal, senior director at Crisil Ratings says, “Borrowers with limited stocks of jewellery will move to the unorganised sector that will continue to offer loans at higher LTV ratios. Interest-sensitive borrowers will shift to banks that offer loans at much lower costs for similar or higher LTV ratios.” Unorganised sector will charge very high interest rates even if you are able to get a higher loan amount.
If you still want to take a gold loan, borrowing from banks may be a better option. Usually, NBFCs extending gold loans offer an LTV ratio of 60%, while banks offer 70 to 85%. Most banks and NBFCs offer similar loan tenure of 12 months on an average. But, banks offer a better rate as compared to NBFCs.
Rate of interest on gold loans from NBFCs can be in the range of 15 to 24% whereas State Bank of India offers loans at 13.95% (up to Rs 1 lakh) and 14.45% (above Rs 1 lakh). Banks mostly offer gold loans of up to Rs 20 lakh. In comparison, NBFCs can offer up to Rs 1 crore loan but lower LTV ratio would mean providing more jewellery for a bigger loan.
At this point in time, if the fund requirement is high opt for loan against financial instruments provided it is not linked to any goal(s), says a senior State Bank of India executive. Therefore, the likes of Swamy may want to consider alternate secured options. Here are some -
Loan against fixed deposits:
If you have invested in a bank deposit, you can borrow against it without breaking it. Here the loan is structured as an overdraft facility against the deposit. Rupee overdraft against non-resident external (NRE), non-resident ordinary (NRO) or foreign currency non residential (FCNR) account deposits are also available.
In case of a company deposit, you can borrow after three months of investing. The same could vary for bank deposits. Certain banks, such as Punjab National Bank, allow loans from the very next day of making a deposit. Some like HDFC may even offer one after six months.
You can avail the loan till the time the deposit matures. If unpaid till maturity, the loan is adjusted against the deposit proceeds. You may or may not borrow against the entire deposit amount.
Banks offer a loan anywhere between 75 and 90% of the deposit. Interest will be around 2 to 2.5% over the fixed deposit rate. The processing fee charged is lower than personal loans.
Loan against life insurance:
If you own a life insurance policy, you can take a loan against it from the bank. The amount depends on the type of policy and the period for which the policy has been in force. The loan is a percentage of its surrender value. In the case of traditional policies, the proportion of the surrender value available as loan may be as high as 90%.
If an insurance company provides a loan against unit-linked plans, the value will depend on the type of fund. The State Bank of India offers this loan at 14.20% for up to six years.
The policy against which the loan is taken will be assigned to the insurance company as a security till the loan is repaid. Any claim or benefit payment will be made after deducting the outstanding amount.
Remember since the loan is linked to the surrender value of the policy, it will be low in the initial years of the plan. The policy may be terminated if the outstanding loan and unpaid interest exceeds the surrender value. The policyholder will lose the cover in such a case.
Loan against mutual funds:
Loan can be secured against both equity and debt funds. Axis Bank gives loan against equity funds at 13% for up to Rs 10 lakh and at 12.75% for more than Rs 10 lakh. You can avail up to Rs 25 crore against debt funds at 12.50% with the bank.
The bank gives up to 60% of the net asset value (NAV) of equity funds and up to 85% of NAV for debt funds.
Similarly other investments like stocks, National Savings Certificate, Kisan Vikas Patra, Fixed Maturity Plans can be pledged to raise funds. Raising funds against stocks can be difficult as the stock market is volatile and if the share price dips you need to put more collateral.
Loan against property:
For those who have more than one residential property can mortgage their property to raise funds. SBI offers up to Rs 1 crore of loan against property at 14.95% for 60% of the market value of the property. Some banks finance as less loan also -- 45 to 50%.
