NBFCs have always been the first choice for gold loans as they process the papers quickly, disburse in cash, and do not question the purpose for which you want money. But this may no longer be the case. Last week, the Reserve Bank of India tightened regulations governing non-banking finance companies (NBFCs) lending against gold jewellery.

NBFCs have been asked to do due diligence of customers before lending money. Where the pledged gold is more than 20 grams, the ownership of jewellery needs to be verified. Also, strict KYC compliance has become a requirement and PAN has been made mandatory for loans above Rs 5 lakh. Rules have also been laid down for calculating the loan-to-value.

With these new norms, gold loans from banks could perhaps become more attractive. This is how.

Higher Loan-to-value

Loan-to-value (LTV) refers to the amount of loan a borrower gets against the pledged gold — this is the margin of safety for the lender against fluctuation in gold prices.

The RBI capped the LTV of gold loan companies such as Muthoot Finance, Manappuram Finance and other NBFCS at 60 per cent in March 2012. But as there was no clarity on what should be the price of gold for arriving at loan-to-value, these companies added jewellery making charges and VAT to the price of gold and offered high LTV to customers.

For example, an enquiry last week revealed that Muthoot and Manappuram Finance offered around Rs 1,900-1,975/gram and India Infoline offered Rs 2,000/gram when the market price of gold then was Rs 2,775/gram.

This means the actual LTV worked to higher than the permitted 60 per cent.

The RBI has now stipulated that NBFCs should use the average of the closing price of gold (22-carat) of the preceding 30 days to arrive at LTV and add no other costs to it. This could lower LTV offered by NBFCs and bring them at par or make them worse off than banks. This is because banks have no cap on LTV for their gold loans. The assessment of risk is left to the individual banks. Some private sector banks even lend up to 75 per cent of value of gold.

On-par processing time

With all these new measures, an NBFC may now take the same time to process your gold loan as a bank. With the usual address and identity proof, you will also be required to fill a detailed KYC form and provide a copy of the PAN card for a loan of Rs 5 lakh and above.

Also, if you pledge gold of more than 20 grams be ready to answer some probing questions about whose jewellery it is, when and where it was bought, and so on.

The loan processing time will increase as finance companies have been asked to give borrowers in writing the purity and weight of the pledged gold. Further, loans of Rs 1 lakh and above are required to be disbursed compulsorily by cheque, which means the borrower cannot expect to receive ready cash.

Lower interest rate

With NBFCs losing out on their key attraction of ‘five minute loan approval’ due to the stringent norms, it may not help to still borrow on steep interest charges. NBFCs charge 24-27 per cent interest annually on gold loans.

Though they agree to reduce their interest rate on lower LTVs, it is still higher than what banks offer. For gold loans, PSU banks charge interest of 13-14 per cent while private banks charge up to 17 per cent.

Besides, on default, NBFCs do not wait for more than 18 months to auction the pledged gold to recover dues. Banks resort to auction only after 36 months.

This gives the borrower sufficient time to arrange for funds. The RBI’s new regulations, however, stipulate that NBFCs must have a transparent auctioning process and give adequate prior notice to the borrower. And, if the auction fetches money over and above the outstanding amount, the financing company is supposed to return it to the borrower.

> rajalakshmi.sivam@thehindu.co.in

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