What explains the popularity of gold with retail borrowers? It's the belief they can sell it quickly or raise money against it. In fact, both banks and non-banking financial institutions (NBFCs) have been aggressively promoting gold loans. The rate of interest, especially for banks, is quite competitive at 14-15 per cent. NBFCs, on the other hand, charge a much steeper rate at 25-30 per cent.
However, there is a wide difference in the way they lend. To garner loans from a bank, one has to go through the entire process of proper valuation and certificate from a certified valuer, etc. The loan-to-value (LTV) ratio is at 70-80 per cent. Also, they are willing to give longer-term loans. On the other hand, given the target audience is different, NBFCs are more liberal, as they do not insist on too many papers. The LTV is capped at 60 per cent of the jewellery. Things could change after the recent fall. But what goes against these loans is that there is no monthly rest. That is, even though you pay the equated monthly instalments, the principal does not go down on a monthly basis.
In such a scenario, if one wishes to raise money, one can look at other options as well. For instance, there is loan against property. HDFC
charges 12.65-12.90 per cent and is calculated on a monthly basis. However, they will give 50-60 per cent of the value. In case, it is the incremental loan (you already have the property on loan), the housing finance company will give 60 per cent of the incremental rise in property price.
Then, there are personal loans, which being non-collaterised, are more expensive. Banks charge around 15-20 per cent interest. Similarly, loan against the surrender value of insurance policies too, is treated as an advance and is very easy to get. For instance, many banks give loans against Life Insurance Corporation and other insurance policies. Even LIC provides a loan against its own policies. And then there are loans against fixed deposits and shares as well.
However, what makes gold loans more attractive is the fact that they are available easily. "Loan against gold is available instantly, which is what made it popular. But since gold prices are volatile, it is a concern," says Ram Sangapure, head of retail, Central Bank.
For loan against shares, most banks offer up to 50 per cent of the value of the shares. But many banks discourage loan against shares, again due to the volatility in share prices. Also, there are restrictions on how much banks can lend since such loans form part of their equity investments and they are required to inform their treasury departments. "We prefer to give such loans only to borrowers we know and whose backgrounds we are aware of. It is also not easy to dispose of shares," says H N Vishweshwar, general manager - planning & development, Syndicate Bank.
For the borrower, there are various things to look at while going for a loan. If the amount that you wish to raise is large, a loan against property works best and cheapest. However, if you want to garner smaller loans, a loan against fixed deposit or insurance policy works out good. Go for a gold loan, only if you are desperate.