There has been a sharp rise in the quantity of men and women demanding gold loans in the course of the pandemic. As financial activities have shrunk, borrowers are turning to pledge their gold to avail credit and meet their health-related and other monetary wants.
Besides this, Ankur Gupta, Founder and CEO, Ruptok Fintech, says, “gold loans are also preferred due to the involvement of less paperwork, availability of flexible schemes and quick disbursements of the loan amount.” Gold loan is an accessible and hassle-absolutely free solution for borrowers, especially for these going for little loans with low-ticket sizes.
While opting for a gold loan, one of the essential determinants is its Loan to Value (LTV). Capped at 75 per cent by the Reserve Bank of India (RBI), LTV is the ratio of the loan quantity to the gold getting pledged. Gupta adds, “LTV is inversely proportional with the ongoing market rate of gold. In cases where the rate of gold rises, the amount available for people to borrow increases. On the other hand, when the price of gold falls, borrowers have to pledge additional gold for the same loan amount.”
For new borrowers, the lender – be it a bank or a monetary institution – arrives at a typical gold worth by tracing the gold price fluctuations more than the period of one month or by analyzing the existing or moving typical price tag. A loan to worth is then evaluated for the borrower by checking the purity of the gold getting pledged. Gupta adds, “The traditional way to do so is by using nitric acid and stone (24k, 22k, 20k). Most banks use a professional loan evaluator for the same.”
Additionally, lenders at occasions also ask for a pre-payment for the current loan quantity, in instances, the price of gold marginally fluctuates in the course of an ongoing or current gold loan. Experts say this is since gold loan lenders typically lend upto 75 per cent of the total gold worth and in instances of falling costs, this worth becomes 80 to 85 per cent.
Gupta says, “This is not a favourable situation for lenders to be in and therefore, this is the stage where lenders ask borrowers to either pledge more gold or pay the marginal difference amount. If borrowers do not do this, financial institutions consider the customer as a defaulter which has a direct impact on the borrower’s credit score.”
Note that, in instances exactly where the default goes upto 90 days, lenders have the solution of liquidating the borrower’s gold by auctioning it. However, business authorities say for most lenders, auctioning the gold is not a main route to stick to, especially if the loan is for a shorter tenure or for a little ticket size.