Tough Times Ahead for Gold Loan Companies - All Your Questions Answered

After reading the last article titled “Tough Times Ahead for Gold Loan Companies” there might be some questions running in your mind. I have tried to answer some of the main questions. If you have any further questions, feel free to leave a comment and I will be more than happy to answer them…

1. Why do customers prefer these Gold Loans?

Let us say I am in urgent need of cash and taking a Personal Loan would take at least 4-5 working days after I submit all the necessary paper work. While I am wondering what to do, my Mom tells me that, I can pledge her Jewels in the nearby Gold Loan Co and get some cash quickly. I take 5 sovereigns (40 grams) of her jewellery and visit the place. The person in the Gold Loan section checks the weight of the jewellery and its quality and gives me a quotation. The price of gold today is going at over Rs. 2600/- per gram which means the necklace is worth a little over 1 lakh. The Gold Loan Co offers me quick cash of Rs. 75000/- on hand and takes possession of the jewellery. I will have to pay a monthly interest and can redeem my mom’s necklace once I repay them the principal of Rs. 75000/-

All things done & dusted in a few hours. Some Gold Finance Companies even advertise super-fast service times like – “Get Cash in 15 mins” and so on to attract more customers.

Most Importantly – This is an extremely better option when compared to loan sharks and illegal lenders who charge exorbitant interest rates and harass customers.

2. How does the 60% Loan to Value Ratio affect Gold Loan Cos?

If, I were a customer, I would have to pledge more gold than before to borrow the same amount of money. Similarly, these companies would have to stop selling certain products which offer more than 60% the value of the gold as loan. Existing customers who are used to getting around 75% of the gold value as loan will end up disappointed as well which will not do much good for the business.

3. Is this 60% Loan to Value Ratio applicable to Banks that offer loans against Gold?

No. This ruling by the RBI is applicable only to NBFC’s that offer loans against Gold. Before you say, this doesn’t make sense, just read the next question/answer which will clarify further on this.

4. Why doesn’t this 60% LTV Rule apply to Banks?

The RBI Feels that, these Gold Loan Cos are growing at an alarming pace and them granting loans of over 75% of the Gold value might adversely affect their business. This whole loan thing is based on the fact that Gold price will not go down. Let’s say, I borrow 10 lakhs against 12 lakhs worth of my Gold Jewels. After a few months, the price of Gold tanks and my gold is worth only 9 lakhs today while the loan I have taken is still worth 10 lakhs only. Will I repay 10 lakhs to take possession of my gold that is worth 9 lakhs? Probably not. In such a situation, such NBFC’s will be forced to declare bankruptcy. To avoid such a situation RBI is setting this 60% LTV ratio so that these gold loan cos have some buffer.

The second part about Banks not being brought under this rule is because – banks can accept customer deposits and as a result have much more cash at their disposal than these Gold Loan Cos. As a result, they can absorb/survive a much higher impact than NBFCs. So, RBI does not mandate this 60% LTV ratio for Banks.

Technically & practically speaking a rule must be common across the board but unfortunately in this case it is lopsided against these Gold Loan Cos.

5. With no upper limit on LTV, can commercial banks kill the private gold loan cos?

Though it is practically possible, banks usually don’t lend amounts beyond 15 lakhs as loan against gold. This upper limit on the loan value is something that almost all banks have. Private gold loan cos don’t have this limit. They will lend you as much money as you want provided you have enough gold to pledge…

Also, banks have a lot of formalities which private lenders don’t. Can you imagine walking into State Bank of India or any other Public Sector Bank and walking out with money in say even 2 hours? I must be out of my mind to suggest something like that. Even private sector banks will make you wait at least a few hours to disperse the funds. Whereas, these gold loan cos will give you cash in a matter of minutes or at most 1 or 2 hours.

So, customers wanting quick & unlimited money supply would still prefer these guys over banks.

6. Does the Capital Adequacy Requirement increase to 12% affect large players like Muthoot or Manappuram Finance?

No. Muthoot maintains a CAR of around 13% and Manappuram maintains a much higher CAR of 18%. So, there will be no impact on either of these companies.

7. Banks have been offering loans against gold for years but, these Gold Loan Cos have out-grown the gold loan lending arm of banks. How was this possible?

There are numerous reasons. Some are:

a. Quicker service – Banks concentrate heavily on their main business like bank accounts, deposits etc. and grant gold loans as a parallel activity. So, service will not be top class. Whereas, the only job these gold loan cos have is granting loan against gold. So they will be much faster.
b. Well-Trained staff – the staff of a gold loan co can check the purity of gold and value it accurately while banks depend on experts who are not full time bank staff. So, there is bound to be some delays
c. Lesser Charges – Banks usually charge a processing fee (1% or so) while these Gold Loan Cos don’t. Also, banks charge a penalty if the loan is repaid within a certain duration (say 6 months or so) whereas Gold Loan Cos don’t.
d. Lesser Salaries – Salaries & Perks that Bank Staff receive a much higher when compared to what the staff of Gold Loan Cos get. So, companies can offer loans at competitive rates when compared to Banks.