What you can learn from recent gold loan fraud cases?

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When the need for money suddenly arises, a gold loan proves to be a companion in distress. But while taking a gold loan, one should not fall into the trap of the lending company. A gold loan can be deceptive! Financial companies engage in manipulation when determining the value of jewellery.

Lets take an example of Rajan who approached a financial institution for loan:

Rajan took a gold loan against 10 tolas or 100 grams of jewellery. The jewellery was of 22 carats. If the price of 24-carat gold is Rs 72,000 per 10 grams, then the value of his jewellery will be determined at Rs 66,000 (Rs 72,000/24 x 22) per 10 grams. Thus, the value of his gold will be Rs 6,60,000.

According to RBI regulations, banks and financial companies can lend up to 75% of the gold value. So, looking in above example, Rajan can get a loan of up to Rs 4,95,000 (Rs 6,60,000 x 75/100). This is called Loan to Value or LTV.

But what happened when Rajan visited the finance company for the loan. He quickly got a loan of three lakh rupees. But on paper the value of gold was calculated on the basis of being 18 carat i.e. Rs 54,000 (Rs 72,000/24×18) per 10 grams.

Rajan protested against this, but he needed the money, so he signed the loan documents. He thought he would redeem the pledged jewelelry within a year. But circumstances arose such that he couldn’t repay the loan. After the finance company issued a notice, it auctioned off his jewelry and withheld the remaining amount from Rajan based on the rate of 18 carats.

If the price of gold is assumed to be Rs 72,000 during the auction, then, the finance company defrauded Rajan of total of Rs 1,20,000. The total fraud was of (Rs 66,000 – Rs 54,000) = Rs 12,000 per 10 gm.

In its investigation, RBI found out that NBFCs iere defrauding the customers in gold loan transactions. This is why the central bank stopped IIFL from giving out gold loans. Several Irregularities related to LTV have come to light in 67% of IIFL Finance’s gold loan accounts. After this disclosure, RBI has tightened regulations on gold loans.

So, if you are considering taking a gold loan, don’t make the mistake like Rajan. If the finance company is not assessing the correct value of your jewelry, try elsewhere for a loan. It is better to get your gold’s purity checked before taking a loan. Nowadays, many big jewellers provide this service for free. Not only that, these also provide purity certificates.