Gold loans popular among small-time businessmen, entrepreneurs
It is less expensive than unsecured loans like personal loans which are often availed to meet working capital needs
During the Covid-19 pandemic, gold loans were a critical source of funding for borrowers. According to data from the Reserve Bank of India, the outstanding debt in this category was Rs 62,926 crore on August 27, with a year-on-year growth rate of 66.2%, the highest among all types of personal loans, reported the Business Standard.
These loans appear to be popular now and will remain so in the immediate future too. According to a recent analysis from CRISIL, non-banking financial institutions (NBFCs), who largely issue loans against gold, are likely to increase their assets under management by 18-20% this fiscal year.
Meanwhile, Punjab National Bank has reduced the interest rate on loans against jewellery to 7.3% in an attempt to make its gold loans more appealing.
Small business owners are heavily reliant on these loans.
Business Standard quoted Praveen Kutty, head-retail banking, DCB Bank, as saying that several entrepreneurs use gold loans as a way to secure the working capital for starting a business.
Easy liquidity
These loans also come with more lenient payback terms. Borrowers have the option of paying in equal monthly installments or making lump-sum payments. The latter option is particularly beneficial to those with variable incomes who find it difficult to stick to a monthly payback schedule.
Business Standard quoted Adhil Shetty, CEO, BankBazaar, as saying that because this is a secured loan, it is less expensive than unsecured loans like personal loans or credit card debt.
One of the major disadvantages of these loans is that if the borrower does not repay the loan, he or she will lose their gold. Banks and non-bank financial companies (NBFCs) can now only lend up to 75% of the value of the gold pledged. These loans have a maximum repayment term of 24 months, which is fairly short. Personal loans can range from 60 to 72 months.
Before deciding on a lender, compare duration, interest rate, loan-to-value ratio, repayment alternatives, processing fee, and prepayment or foreclosure charges.
The report further quoted Shetty as saying that it is advisable to choose a regulated lender like a bank or NBFC as their interest rate is low.
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