Gold – the yellow metal, the metal favored by women and men alike. For women, it has ornamental value while for men it has an investment value as gold is always found to appreciate in value over time. If numbers are to be believed, India’s gold imports have shown an increasing trend over the years because consumers are continuing their romance with this favored metal. To cash in on this romance, banks and financial institutions are offering gold loans against the pledge of gold ornaments owned by individuals. These loans are easy to avail, cheap and less risky (from the lender’s perspective) and are highly favored by both borrowers and lenders. The popularity of gold loans is reflected in their CAGR which shows that the Compounded Annual Growth Rate of Gold Loans outstanding from 2008 to 2012 was 57.5% for banks and 98.5% for Non-Banking Financial Corporations (NBFCs).
In short, gold loan is becoming an increasingly favorable borrowing option for many individuals. When it comes to geographical distributions, South Indian leads the race with an annual gold loan demand of 40% followed by West India at 25%, then by North India in the range of 20% to 25% and the race completes with East India with only a 10% to 15% demand of gold loan. Bangalore, Ahmedabad and Mumbai are the top 3 cities which have the highest demand for Gold Loans as people have no qualms in obtaining this easy source of finance. With all the brouhaha over gold loan, here are some reasons why gold loans are a current favorite of many borrowers:
- Low rate of interest – one of the primary reasons of availing this loan is because the loan promises a lower rate of interest compared to other personal loans which are unsecured and thus, have a higher interest incidence.
- Easy availability – unsecured personal loans are issued after checking the creditworthiness of the applicant and usually require thorough checking on the lender’s part and waiting on the borrower’s part. Gold loans are sanctioned against the security of gold ornaments and are thus easily available
- Utilization of assets – your gold ornaments, though assets, remain sitting in your lockers because of lack of any apparent use. A loan against these assets, thus, sounds practical as you can avail money on your ornaments for meeting your personal or business related expenses without having to sell your ornaments off.
- Easy procedure – since the loan is issued against gold assets, the requirement of documents is reduced and the loan processing procedure becomes shorter. This entails easy availability of finances through an easy application and sanction process
- Flexible – many lenders provide for an overdraft facility wherein the interest is charged only on the borrowed amount. There is also the prepayment facility extended by other lenders where the loan can be prepaid anytime without additional charges while some lenders insist only on the interest payments during the loan tenure. Thus, a gold loan comes with flexible features which are suitable for borrowers.
- Beneficial for lenders – since lenders obtain the security of the gold ornaments, they do not have any default risk of non-repayment of the loan. The loan is issued based on the value of the gold pledged with the lenders and as such, the applicant’s income capacity and financial position does not indicate the repayment potential. Thus, lenders are risk-free when it comes to obtaining the repayment of their loans granted.
With so many benefits, no doubt the gold loan sector recorded such a high Compounded Annual Growth Rate (CAGR). Borrowers in Bangalore, Mumbai and Ahmedabad have contributed prominently to the gold loan growth rate story. Gold loan is issued based on the prevailing price of gold and the current price per 10 gram of gold on the date of writing this article in these top 3 cities is as follows:
Purity of Gold
24 Karat Gold
|22 Karat Gold||Rs.28,000||Rs.29,600||
The prices fluctuate every day and as is evident above, is region-specific. The purity of the gold pledged, the current prevailing price of gold and the total quantity of gold pledged are the factors which determine the amount of loan available to the borrower. So, India is taking leaps and bounds in securing a gold loan, how about you?