What is Core & Satellite strategy?

The Reserve Bank of India has taken action against IIFL Finance for irregularities in its gold loan portfolio. An investigation found that 67% of the company’s gold loan accounts had discrepancies regarding the loan-to-value or LTV ratio. The company was found to have manipulated the gold price while disbursing loans. In response, the RBI has barred IIFL Finance from issue of new gold loans.

Gold loans are a popular option for borrowers in India. these are easy to obtain and require minimal documentation. Many non-banking financial companies or (NBFCs) offer gold loans at doorstep, making these even more accessible. The process of getting a gold loan is simple. The borrower approaches a bank or NBFC and pledges his gold as collateral. The lender then assesses the value of the yellow metal. It disburses a loan of up to 75% of its value.

Before you take the loan, it is important that you get the gold valued independently. This will help you ensure that you get a fair deal from the lender.

These days, many institutions like Tanishq and Kalyan Jewellers give free gold valuation services. You will also get a receipt.

If a finance company assesses your gold at a lower price, be cautious. Understand well that it might have fraudulent intentions. If you take a loan from such a company, they might manipulate interest and penalties levied.

There’s a significant difference in the interest rates of gold loans of banks and NBFCs. For instance, government banks offer gold loans at 8.65% to 11%, while private sector banks like Axis and HDFC charge  17% annually. Meanwhile, NBFCs charge interest rates of up to 36%.

Similarly, there’s a significant difference in the processing fees. SBI and Canara Bank charge processing fees of 0.5% or up to a maximum of ₹5,000 on the loan amount. Meanwhile, NBFCs charge processing fees of 1%, or, even more. If you do a little homework, you can save a considerable amount on interest every year.

Gold loans usually have a tenure of up to three years. There are several options available for repayment. In the first option, you pay interest every month. You can repay the principal at the end. In the second option, interest and principal are combined to calculate the EMI. You pay it every month. Some gold loans offer the bullet payment option. For example, if you have taken a loan of ₹1 lakh, and the annual interest amounts to 10,000 rupees, you can repay the entire ₹1.10 lakh at once and retrieve your gold. You can choose the option according to your convenience.

Personal finance expert Jitendra Solanki suggests that the loan amount for gold loans is always lower than the value of gold. If a finance company undervalues your gold, you’ll naturally get a lower loan amount. If due to any compulsion you’re unable to repay it, your gold might be auctioned, it will cause you significant loss. Therefore, do thorough research of the valuation of the gold, interest rates, and processing fees, before you decide from where you will take the loan.

Due to the business profitability, there are a plethora of lenders offering gold loans in the market. However, you should only take a gold loan from RBI-regulated banks or finance companies. Choose the loan amount and options based on your repayment capacity.