A Pricey Deal

Dipak Mondal/Money Today        Print Edition: May 2012

Why would you pledge gold for a loan when you can borrow from banks without collateral at almost the same rate? Or why would you take gold loan from a non-banking finance company, or NBFC, when banks charge a lower rate?

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The answer is convenience. The 'gold loan in five minutes' sales pitch of NBFCs may not be true in letter but is true in spirit.

As gold loans are secured, NBFCs relax the due diligence process. Banks, which have to follow strict Reserve Bank of India, or RBI, norms on bad loans and minimum capital, do not have such liberal rules on giving loans, either secured or unsecured.

But should you be guided only by convenience?

Moreover, the recent RBI order limiting loans by NBFCs to 60 per cent value of the pledged gold has further taken the sheen off such loans, which are very popular in India.

You can take gold loans by pledging jewellery and gold coins (only in case of banks). NBFCs can offer loans only against gold jewellery. The purity of gold should be 18-24 carat. The lenders-banks and NBFCs-determine the value and give a part of that as loan.

Functional restrictions on NBFCs vis-a-vis banks
Since valuation is done by the lender, you can either accept its figure or walk out. The documents required are address proof, identity proof, signature proof and passport size photographs.

If you fail to pay regular interest or principal and interest, the lender sends reminders, usually after three, six and 12 months. After that, if you still do not pay up, the gold is melted and auctioned to recover the outstanding amount.

As both banks and NBFCs offer gold loans, a comparison of rates, eligibility rules and loan amounts offered by them is important.

The RBI decides how much loan can be given as a proportion of the gold's value. At present, NBFCs cannot offer more than 60 per cent. Earlier, there was no such cap and usually NBFCs used to give up to 80-90 per cent value of the gold pledged. This means on jewellery worth Rs 5 lakh, you can now get Rs 3 lakh from an NBFC, as against Rs 4-4.5 lakh earlier.

In case of default, the gold pledged is melted and auctioned by the lender to recover the outstanding amountHowever, banks are free to decide the loan-to-value ratio. You can, therefore, get a higher amount by pledging the same gold with a bank than with an NBFC.

Satkam Divya, business head, Rupeetalk.com, says the cap imposed on NBFCs will give banks an edge. "Banks have a diversified business and, therefore, are better equipped to absorb losses from fall in the value of gold against which the loan has been given," says Satkam Divya.

However, there is one disadvantage of taking gold loans from banks-the total amount you can get is much less. For instance, Muthoot Finance and Manappuram Finance offer loans up to Rs 1 crore, while Muthoot Fincorp has no limit. HDFC Bank and ICICI Bank give a maximum of Rs 10 lakh and Rs 15 lakh, respectively. Federal Bank offers loans up to Rs 75 lakh.

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Charges and other strings attached:
Most banks charge a processing fee of 1-2 per cent of the loan value. ICICI Bank charges 1 per cent while HDFC Bank charges 1.5 per cent. NBFCs like Manappuram Finance, Muthoot Finance and Reliance Commercial Finance do not charge any processing fee.

Banks also charge a fee for valuing gold. NBFCs do not charge anything for this.

Banks usually restrict funds' end use. Some offer loans only for agriculture. HDFC Bank's eligibility column has a note that says "the loan amount cannot be used for speculative activities, any purpose linked to capital market activities or for any anti-social purposes." Bank of Baroda mentions that the loan will be disbursed for "working capital requirement and/or purchase of equipment for development of shops."

27 per cent is the highest interest rate charged by any NBFC on gold loans.

Interest rates:
Despite collateral, NBFCs charge very high rates. Manappuram Finance charges 2.17 per cent a month or 26 per cent annually on Rs 1,800/gm loan while Muthoot Fincorp charges 24-27 per cent annually. Muthoot Finance has a wider range, 12-24 per cent. It offers a maximum loan of Rs 50,000 at 12 per cent and a maximum loan of Rs 25,000 at 27 per cent for a tenure of three months .

Banks, on the other hand, are offering gold loans at 14-16 per cent a year excluding the 1-2 per cent processing fee. The interest is charged on a diminishing balance basis.

Thomas John Muthoot, chairman and managing director, Muthoot Fincorp, says since banks' cost of funds is extremely low, they can charge less.

Banks have access to low-cost deposits in savings and current accounts. NBFCs are not allowed to collect low-cost short-term deposits.

NBFCs allow borrowers to repay just the interest regularly during the tenure of the loan and pay the principal at the end of the tenure. Gold loans by most banks, especially public sector banks, are term loans, which means both interest and principal have to be paid regularly. Most NBFCs allow prepayment without penalty. Banks do not offer this facility.

The eligibility criteria and the due diligence for personal loans are much stricter because they are unsecured. In case of default, the lender does not have the option of selling the borrower's assets.

Interest rates on personal loans vary from 16 per cent to 24 per cent, excluding the processing fee, which is 1.5-2.5 per cent of the loan amount.

Value for Gold: NBFCs and banks head-to-head on gold loan parameters
The loan amount depends on income. The limit is Rs 15-20 lakh depending on income and credit history. For salaried people availing of personal loan from ICICI Bank, the net monthly salary has to be at least Rs 20,000, while for taking a loan from HDFC Bank, the monthly salary has to be at least Rs 15,000.

Then there are pre-payment charges that could be as high as 5 per cent of the outstanding loan amount. Unlike in gold loans, both interest and principal have to be paid in monthly instalments.

"Personal loans are the costliest form of credit after credit cards," says Rakish Goyal, senior vice-president, Bonanza Portfolio.

Gold loans offered by NBFCs are hassle-free, easy to take and require little documentation. They have easier repayment options and no processing fee, though the rates are higher than bank gold loans or personal loans. Those who cannot fulfil the strict eligibility and documentation criteria of banks can tap this avenue.

Those who have good credit history, the required documents and are in mid- to high-income categories should look for options available with banks.

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