Lenders are renewing focus on gold loans expecting that there could be a higher demand for this product in the coming months as small businesses and individuals face cash flow problems. On 11 June, ICICI Home Finance started offering gold loans through its 70 branches. Last month, Canara Bank restructured its business to launch a gold loan vertical.
ICICI Home Finance expects that more individuals would opt for gold loans as many small business owners and households are facing stress. “There was a time when people didn’t want to touch gold. But times have changed. People’s reluctance to pledge gold and meet their cash flow problems is slowly diminishing. I sense that we will see momentum in gold loans due to this,” said Anirudh Kamani, CEO, ICICI Home Finance.
The housing finance company (HFC) is offering only bullet repayments for gold loans. Under this, typically, a borrower pays the interest for the tenure of the loan and towards the end, repays the principal amount. “In gold loans, borrowers prefer bullet repayments,” said Kamani.
While the company will be offering loans to a different category of customers, their focus is going to be on small business owners who have working capital needs.
After the merger with Syndicate Bank, Canara Bank’s gold loan portfolio is now about ₹56,000 crore. “We created a special gold loan vertical within our priority credit as people have a cash flow mismatch,” said A Manimekhalai, executive director at Canara Bank.
According to Manimekhalai, the bank brought down the interest rates when it discovered that customers preferred other lenders as they found Canara Bank’s rates to be higher. As a focused special vertical, there will be one banking officer at each branch who will only look at gold loans.
Manimekhalai expects higher demand for gold loans at least until September. “From May onwards, the number of loan accounts per day and loan amount have gone up. We expect this to continue until things stabilize and the lockdown is entirely lifted,” she said.
Both the lenders offer gold loans of up to one year. While ICICI Home Finance gives a loan of up to ₹10 lakh, Canara bank offers a maximum amount of ₹20 lakh. Most lenders claim that borrowers can get a loan within half an hour if they have their KYC (Know Your Customer) documents.
The non-banking financial companies (NBFC) focused on gold loans are already witnessing higher demand. “There is certainly a demand for gold loans that is being witnessed in the market currently, however, we believe that it will be sometime before we start seeing a notable surge in terms of assets under management (AUM) growth. We also feel that with Unlock 1.0 now in place, markets are gradually opening up, and this will probably lead to a great demand for gold loans in the coming weeks and months,” said George Alexander Muthoot, managing director, Muthoot Finance.
According to Muthoot, micro, small and medium enterprises will need instant credit facilities to revive and kick-start their businesses. The gold loan works as the process is quick and requires minimum documentation. The NBFC launched at home gold loan service recently, which brings the convenience of doorstep gold-banking to customers. It’s being done in a phased manner.
WHAT YOU NEED TO KEEP IN MIND
Lenders typically give up to 75% of the gold’s value as a loan. Higher the purity of gold, the higher will be the valuation and the loan amount. Most lenders ask for minimum 18-carat purity. If you are looking to take a loan against jewellery, the lender won’t consider the value of gems and stones and they accept coins with a purity of 99.99% and up to 50 grams. Also, many lenders don’t offer a loan against gold bars.
Usually, there is no prepayment on gold loans. A few banks can charge up to 1% of the outstanding loan. Besides processing fees, lenders can also levy valuation charges.
Also, if the borrower is unable to repay the loan on time, lenders have the right to auction the gold. But this is done after several reminders.
A gold loan can help you tide over the temporary cash-flow problem, but remember to keep the loan tenure short.