The Reserve Bank of India has issued a notification to all non-banking finance companies saying that the loan-to-value (LTV) should not exceed 60 per cent of the pledged gold. This effectively means that a borrower would have to pledge more gold to borrow the same amount . Sample these numbers : With gold loan companies lending up to 90 per cent of value of gold earlier, a borrower could have taken a loan of Rs 1 lakh by pledging around 44 grams of gold (at Rs 2,500/gram). However, now, the borrower would be required to pledge a minimum of 66.5 grams of gold (at same the rate for gold). At LTV of 60 per cent, 44 grams gold would be eligible for a loan of only Rs 66,000.
Banks though may not let you negotiate on processing fee or help you with a fast track approval process, but can offer a relatively higher LTV on the collateral and a lower interest rate too!
For borrowing against gold, banks have all along been the last of options. This was mainly because of the low LTV offered. However, now that gold finance companies have been mandated to lower their LTV to 60 per cent, the offer from banks looks very attractive. Most banks give a LTV of 80-85 per cent on gold collateral. At 80 per cent LTV, if the market price of gold is Rs 2,600 your gold will be valued at around Rs 2,080 a gram. Federal Bank for instance pays Rs 2,000/gram currently for the pledged gold.
Another benefit of borrowing from a bank is that the borrower gets to enjoy a lower rate of interest. The current interest rate on gold loans from banks is 12-15 per cent a year. Gold finance companies however charge around 25-27 per cent .
Earlier, finance companies tweaked the interest rate depending on LTV and the duration of the loan. Now post the RBI's mandate, most gold finance companies are making interest rates independent of the LTV. Manappuram Finance for instance now charges interest at a fixed rate of 2.17 per cent a month (26.04 per cent a year), irrespective of the loan duration and LTV.
With banks the minimum period of loan is normally six months . Also, the rate at which the banker will value gold will not change dynamically with the change in market price of gold. They are revised generally on a monthly or a weekly basis.
For processing a gold loan request, banks charge around 1 per cent of the loan value as interest and in some cases borrowers face an additional charge under stamp duty and assayer charges. Gold finance companies however have a very nominal processing charge and this again is a fixed amount and doesn't vary with value of the loan. At Manappuram Finance for instance the processing fee is Rs 8 and from the second month of the loan the borrower is levied Rs 2 as renewal fee in addition to the interest.
Banks also take a relatively longer time to process a gold loan. This is generally because of the additional paper work and some times because of certain procedural delays and glitches at the back-end.