The Reserve Bank of India (RBI) is ready to tighten the screws on gold loans and very thoroughly address the already-known gaps in the current framework. Golak Mathur, RBI Governor, expressed this during the announcement on the monetary policy on April 9.
The announcement has raised panic among borrowers and lenders regarding the future. Gold loan company shares fell by as much as 10% right after the announcement, reflecting the fears inherent in the market.
What will this mean for gold loan customers? Will it get tougher to take a loan against gold? Let us look at possible scenarios.
Why Is RBI Revising Gold Loan Rules?
There are serious flaws with the current gold loan operating system, according to the RBI. The basic intent is to standardize the regulations that apply to both banks and gold loan companies to preserve fair practices for better customer protection. Right now, divergent lenders are trying to follow different loan-to-value (LTV) ratios, and then some are using third-party fintech procuring agents to store the RBI sees this as too much of a risk.
Also, the IRDA has seen some relaxation in due diligence being exercised towards gold loan approvals, increasing the chances of default. Obviously, with stricter guidelines, it unarguably works well with lending more publicly or fairly.
Will Borrowers Face Difficulties in Getting Gold Loans?
Governor Malhotra clarified that the new rules would not interfere with access to gold loans. Borrowers should still be able to access loans as always; however, the revised framework could work better at encouraging banks and asset protection finances to act with stricter discipline when lending approvals.
The impact that the new requirements may have on gold loans could also put lenders more at ease and therefore, attract more competitive rates for customers, along with favorable terms.
How Does the Gold Loan Process Work?
The current process speaks volumes about how RBI’s amendments will affect the matter:
- Pledge of gold Jewelry, coins, or even gold bars will be put up as collateral by the customer or borrower.
- Valuation: gold purity and market value will be assessed by the lender and offered for lending purposes up to 75% of the value of the gold.
- Repayment EMIs will be used by the borrowers or a bullet payment will be made by the borrower at the end of the loan term in case of gold loans.
The security offers minimum risk to lenders, which makes it a lucrative business. However, the RBI now seeks to tighten storage norms and auction procedures in case of defaults, so as to safeguard the interests of customers.
Current Interest Rates on Gold Loans
- Banks: 9%-15% per annum
- Gold loan companies: 12%-27% per annum
Banks usually charge lower interest rates, but processing in the case of the gold loan company is faster. With the implementation of the new law, the rates might get even more stabilized for the customers.
What Makes It Attractive To Get A Gold Loan?
In recent years, banks and NBFCs have been aggressively entering into the gold loan market due to:
- High profitability on account of secured lending being less risky.
- Increasing demand from small businesses and individuals needing funds in a hurry.