A PRICEY DEAL

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A PRICEY DEAL

By Dipak Mondal

Gold loans from NBFCs, though convenient, are more expensive than those offered by banks 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 ( NBFC) when banks charge a lower rate? The answer is convenience. The gold loan in five minutes” sales pitch of NBFCs may not be true 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 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 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 popular in India. GOLD LOAN PRIMER You can take gold loans by pledging jewellery and gold coins ( only 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 part of that as loan. Since valuation is done by the lender, you can either accept its figure or simply walk out. The documents required are address, identity and signature proofs and passport size photographs. If you fail to pay regular interest principal interest, the lender sends reminders, usually after three, six and 12 months. And still you do not pay up, the gold is melted and auctioned to recover the outstanding amount. BANK VS NBFC As both banks and NBFCs offer gold loans, a comparison of rates, eligibility rules and loan amounts offered by them is important. Loan- to- value: 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- per cent value of the gold pledged. This means on jewellery worth ` 5 lakh, you can now get ` 3 lakh from an NBFC, as against 4- ` 4.5 lakh earlier. However, 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,” Divya added. 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 ` 1 crore, while Muthoot Fincorp has no limit. HDFC Bank and ICICI Bank give a maximum of ` 10 lakh and ` 15 lakh, respectively. Federal Bank offers loans up to ` 75 lakh. Charges and other strings attached: Most banks charge a processing fee of one to two per cent of the loan value. ICICI Bank charges one per cent while HDFC Bank charges 1.5 per cent. NBFCs such as 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.” Interest rates: Despite collateral, NBFCs charge very high rates. Manappuram Finance charges 2.17 per cent a month or 26 per cent annually on ` 1,800/ gm loan while Muthoot Fincorp levies 24- 27 per cent annually. Muthoot Finance has a wider range, 12- 24 per cent. It offers a maximum loan of ` 50,000 at 12 per cent and a maximum loan of ` 25,000 at 27 per cent for a period of three months. While banks are offering gold loans between 14 and 16 per cent a year excluding the one to two per cent processing fee. The interest rate 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. Repayment: NBFCs allow borrowers to repay only the interest regularly during the tenure of the loan and pay the principal at the end of the period. Gold loans by most banks, especially public sector banks, are term loans, which means interest and principal have to be paid regularly. Most NBFCs allow prepayment without penalty. Banks do not offer this facility. GOLD VERSUS PERSONAL LOAN 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. The loan amount depends on income. The limit is ` 15- ` 20 lakh depending on income and credit history. For salaried employees availing of personal loan from ICICI Bank, the net monthly salary has to be at least ` 20,000, while for taking a loan from HDFC Bank, the monthly salary has to be at least ` 15,000. Then there are prepayment charges that could be as high as five 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 vicepresident, Bonanza Portfolio. THE FINAL CALL 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 interest 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 people who have good credit history, the required documents and are in the mid- to high- income categories should look for options available with banks. is the highest interest rate charged by any NBFC on gold loans 27% In case of default, the gold pledged is melted and auctioned by the lender to recover the outstanding amount