Offering loans against gold has become popular in recent years due to the ease of the process, less paperwork, quick availability of financing and a variety of repayment options. File | Photo source: Reuters
Banks have instructed their branches to ensure that gold loans availed by customers are repaid and closed rather than renewed or upgraded.
Offering loans against gold has become popular in recent years due to the ease of the process, less paperwork, quick availability of financing and a variety of repayment options. Borrowers can pledge their gold as collateral and borrow the principal amount based on the gold’s purity, weight and market rate. For non-agricultural gold loans, the Loan to Value is 75%.
The interest rates and tenure vary from bank to bank and there are various repayment options, including repayment of interest and principal in an equal monthly installment (EMI), repayment of interest as EMI and principal at the end of the term, and a lump sum payment option where the principal and interest is repaid at the end of the loan period.
“There was a practice of evergreening – giving recent loans to borrowers to prevent the loss of an existing loan. If gold price increases, borrowers who have not paid interest on gold loan properly will approach the bank, seek enhance in gold loan and open a recent loan account,” said RS Dhuriyan, advocate, Indian Bank.
For example, if the value of the jewelry was ₹ 1 lakh at the time of availing the loan and the price increases to ₹ 1.50 lakh, the customer can seek loan enhance by an additional ₹ 50 lakh in the recent loan account, he noted.
However, he added that RBI rules do not allow for an evergreen environment. He added that after the banks were inspected post-audit, the RBI ordered them to follow the rules.
“I have a gold loan from a public sector bank in Pattabiram and I went to pay the interest, the bank official said I cannot renew the gold loan after the tenor… Many customers are paying interest and trying to renew their gold loan,” he said Subha (name changed). Bank officials confirmed that branches have received verbal instructions not to extend existing gold loans.
Consumer activist T. Sadagopan said it was understandable that the regulator wanted to ensure repayment of existing gold loans, but banks should be crystal clear by informing customers that they should have repaid gold loans.
