Turning Treasures into Funds: A Guide to Gold Loan Processes and Benefits

Why do borrowers prefer the Gold Loans over Personal Loans?

#1 Low Rate of Interest

The rate of interest against gold loans is historically lower starting from 7.35% than most unsecured loans like personal loans start from upwards of 10%. Interest rates on gold loans in India typically range from 

• 7.35% to 18% per annum for public-sector banks 
• Up to 26% per annum for private-sector lenders

Banks generally charge lower interest rates compared to NBFCs for gold loans some lenders also slap a 1-3% loan processing fee. The gold loan rate of interest varies with each lender and is typically based on the gold weight, loan amount, loan tenure, and the borrower’s credit history. 

#2 Minimal Documentation

Since the gold itself stands as collateral, lenders don’t require extensive credit checks or proof of income. The documentation required is minimal, limited to basic identification and address proof. 

Eligibility Criteria To Secure A Gold Loan

Gold Loan eligibility criteria determine whether the borrower can secure a loan against his/her gold loan assets. Fulfilling the eligibility criteria and having all the required documents will streamline the loan application process and enhance the chances of securing the loan. 

Documents required for Gold Loan

Any individual between the age of 18-75 having the following documents can avail of a Gold Loan. Here’s a list of what you will need:

#3 Maximum Loan Amount

Gold loans offer a high loan-to-value (LTV) ratio, which means the borrower can get a substantial loan amount based on its current market value. LTV or the Loan to Value ratio is the ratio of the loan amount sanctioned for the value of gold deposited by the borrower as collateral. A higher LTV ratio would result in a higher interest rate, indicating a riskier investment for lenders.

LTV = Taking the loan amount / the market value of the borrower’s collateral

RBI Guidelines on Gold LTV Ratio:

• Maximum Limit

Presently, the maximum gold loan-to-value ratio (LTV) set by RBI is 75% of the gold’s market value. Borrowers can get a loan amount equivalent to 75% of their pledged gold’s worth. RBI sets a maximum LTV to prevent excessive lending which could lead to higher default risks. 

• Temporary Increase

During the COVID pandemic, the RBI temporarily increased the LTV to 90% to help individuals facing financial difficulties. However, this relaxation in LTV was available only till March 31, 2021.

#4 Flexible Repayment Options

Gold loans offer flexible repayment options for the borrowers, that let them repay the amount without affecting their finances. 

• Bullet Repayment: Borrowers repay the entire principal and the interest amount is paid at the end of the loan tenure. 
• Instalment Repayment: Loans can also be repaid in EMIs, where both principal and interest are paid off gradually over the loan term.
• Overdraft Facility: Some lenders provide an overdraft facility where borrowers can withdraw funds as needed up to a specified limit, paying interest only on the amount utilized.
• Part-Payment: Borrowers may make partial payments towards the loan, reducing the principal amount and thereby the interest burden.

#5 Quick Processing

Gold loans are one of the quick and easy loans to process. The loans are approved within a few hours of application and the loan amount is disbursed quickly. 

In general, a gold loan can be approved in 90 to 120 minutes, depending on the customer’s ability to submit the necessary KYC documentation and bank rules. 

#6 Tax Benefits of Gold Loans

Gold loans offer various tax benefits making them an attractive option for borrowers.

• Home Improvement:  Under Section 80C of the Income Tax Act, 1961, Borrowers can opt for gold loans to meet the cost of home improvement expenses that are eligible for tax deduction. Tax benefits amounting to Rs 1.5 lakh can be availed and the deduction is applied to the principal payment.

• Purchasing/ Construction of Residential Property:  Under Section 24 of the Income Tax Act, gold loan borrowers can claim a tax deduction of up to Rs2 lakh in a tear if the loan amount is used for the purchase or construction of residential property. 
• Business Expenses: Taking a gold loan to meet expenses related to the business also has tax benefits. The loan amount can be deductible as a business expense under the Income Tax Act, effectively bringing down overall tax liabilities.
• Other Assets: If the borrower uses the gold loan for the purchase of assets like stocks, equities, bonds, or any other assets than property, they can claim the interest paid towards the gold loan as a cost of acquisition, which reduces the taxable capital gains and cut downs the tax liability. 

What happens If The Borrowers Cannot Repay the Loan?

Typically lenders give numerous reminders via calls, messages, and emails to repay the loan along with some extra time after the due date. However, if the borrowers consistently default on payments then these actions might follow

The lender charges a penal interest

The lender will charge an additional interest rate over the applicable interest rate for the months on which the payments have not been made. This penal interest is usually charged at the rate of 1% to 7%p.a., and it varies from lender to lender.

The lender can auction the gold

Gold is pledged as collateral against the loan, and hence failure to repay will give the right to auction the gold by the lenders. The gold will be considered a non-performing asset and sold off at a fair price to recover or offset the losses incurred from the loan. If the sale happens more than the to-be-paid amount, the remaining amount will be returned to the borrower. 

The lender might take legal action

If the amount received through the gold auction is insufficient to close the loan, the lender can also take legal action against the borrower. The legal actions may vary depending on the jurisdiction and the loan agreement terms.

Negatively Impacts the CIBIL™ Scores

Defaulting on gold loan payments can negatively impact the borrower’s credit score, which makes it difficult for them to avail loans in the future. 

Jumping Interest Rate

When the borrowers delay their EMI payment in the month it’s due, they can be charged an extra rate on interest on the overdue payment. This is called the Jumping interest rate and it can go above the base interest rate. For example, A borrower takes a loan for ₹10,000 on 1st August and his next repayment date is 1st September with a 1% interest. In case the borrower doesn’t pay, the interest for the following month will jump to 2%. After the borrower starts paying the amount properly, the interest rate will be taken back to 1%.

What are the Challenges faced by the Lenders in the Gold Loan Processing?

Despite the promising market, lenders face several challenges when it comes to gold loans:

Dependency on Assessor

Lenders usually rely on gold assessors to test the purity and the value of the collateral gold. When the assessors are unavailable, then dependency causes delays in loan processing. They assess the gold manually which is prone to human errors and inaccuracies. This affects the lenders and borrowers, due to inconsistencies, and increased processing times. 

Documentation and Compliance

RBI has stringent norms and gold loan applications that are non-compliant lead to delays or rejections. However, with the traditional paperwork process, lenders face complexity in adhering to regulatory requirements. 

Operational Efficiency

Traditional loan processing methods result in operational inefficiencies with up to 25% higher operational costs compared to automated systems. Loan applications are delayed due to manual errors in the verification and validation process. Inefficiencies can lead to longer loan processing times, increased overheads, and reduced customer satisfaction. 

Handling Multiple Jewels

Borrowers often pledge multiple pieces of jewelry for loans. Each and every jewel pledged by the borrowers needs to undergo individual appraisal and documentation. This adds even more complexity to the appraisal process it requires meticulous record-keeping to ensure each item is correctly valued and tracked. 

Locker Issues

Safeguarding all the pledged gold is no easy task. Lenders require secure lockers to store the gold. This involves the cost of the security, insurance, and maintenance of the gold items. Issues with locker availability, security, or management can jeopardize safety. Also, packing, unpacking, and returning the jewels to the borrowers upon repayment requires careful management to avoid loss, damage, or mix-ups. This process is labor-intensive and necessitates robust protocols.

Increasing Competition

India’s gold loan market is witnessing neck-to-neck competition as new entrants flood causing lenders to offer lower interest rates and better terms for borrowers. The rise of NBFCs and online gold loan platforms has intensified the competition. Now, lenders are trying to leverage technology for an improved customer experience and gain an edge in this market. 

Unorganized Gold Loan Market

For decades, gold loans have been availed by people from all sections of society from the unorganized market through pawn brokers and lenders. These lenders, having local market knowledge, provide quick funds with almost no documentation and exorbitant interest rates. Although it is completely unregulated and involves many risks, it holds 65% of the gold loan market.

The shift from unorganized sources of finance to organized lenders for gold loans is gaining momentum. Increased awareness about the risks associated with informal borrowing has driven more people to seek reliable, regulated options. Organized lenders are capitalizing on this trend by integrating advanced lending software to streamline their processes. Borrowers benefit from improved efficiency, enhanced security, and greater transparency, making organized lenders a more attractive choice for gold loans. 

How Digital Lending Software Transforms Gold Loan Management?

Digital lending platforms are the operational engine for seamless business flow in the gold loan management industry. Used for loan maintenance, gold loan renewals, multi-valuation, rebate calculations, margin calls, maturity date reminders, and more, gold loan software provides a clean-cut, no-frills, and efficient solution to gold loan lenders Digital lending software reduces manual intervention through automated processes and streamlines the workflow.

• Digital KYC: Quick and accurate verification of customer identities through digital KYC processes.
• Automated Valuation: Use of advanced algorithms to assess the purity and value of the gold.
• Instant Approval: Speeding up the approval process through automated decision-making.
• 24/7 Access: Customers can apply for loans and check their status anytime, anywhere.
• Data Analytics: Leveraging data to make informed decisions and identify trends.

Door-step Onboarding

Now loans against gold can be availed right from the borrower’s home through door-step onboarding. It’s all completely automated and digitized: a customer service rep visits the borrower’s house with a tablet (which has weighing equipment attached) on a pre-fixed date and time.

1. Carries out digital checks of required documents, 
2. Verifies and vets their gold assets
3. Input all these details into the gold loan origination software built-in into the device
4. Generates the loan documentation
5. Gets automated approval through the software 
6. Immediately disburses the loan to the borrower’s account. 

The gold is kept in a tamper-proof packet that is marked with a unique customer ID and is stored in a vault room at the lender’s premises. A vault number is allocated against the customer’s loan ID for easy tracking. During this entire process, the customer representative’s location is monitored. Some lenders also offer insurance coverage against gold loans, although the coverage amount is limited based on the lender’s discretion. 

How does Cloudbankin make the Gold Loan Process Simpler and Faster?

CloudBankin’s scalable loan origination system and loan management system handle the entire lifecycle of a gold loan, from loan origination to closure.