The last few years, the gold loan business has been performing quite well. In fact, its good performance has led many new companies to try their luck in this industry segment. Right now, however, the situation has changed drastically. The companies who arrived in the industry to try their luck, and even the big industry players who were already there, are having second thoughts. Should they bail out, shut down, or continue trudging onwards?
Right now, it is a dying business if you are an NBFC (Non Banking Financial Corporation). But if you are a bank, well, things are not so bad for you. The thing is that the RBI has put a whole lot of restrictions on NBFCs. There are many rules in place to curb their unchecked growth, and to bring the gold loan industry under a more national control under the RBI.
Since it was not possible if an NBFC operates without any regulations, the central bank now gives several guidelines and has imposed many restrictions on NBFCs. For instance, there are severe restrictions on an LTV that these institutions can have for gold loans.
What is happening right now?
Right now, NBFCs have to stick to a cap of 60% LTV. This means that if the value of your gold is Rs. 100, you will get Rs. 60 as the loan. Add in things like extra charges and processing fees, what you get in the end is pretty less. The situation for NBFCs this year is not good. In fact, many have projected a flat growth curve in 2020.
The RBI arrangement for more capital requirement for these institutions from 10% to 12% has heightened the problem. Things are bad enough to stop the expansion of major players in this industry segment like Manappuram Gold, Muthoot Finance and Shriram city. Some NBFCs are closing down their non-viable branches to overcome the current problem. The RBI has also restricted primary gold and gold coin sales by them.
A bad time for GFCs
When the NBFCs are losing, banks are winning in the gold loan business. Very recently, the RBI has denied all; requests by NBFCs to allow similar regulation of gold loan activity which the central bank has sanctioned for banks all over the country. All of this goes on to show that the RBI is concerned over NBFCs capacity to handle doing business in this sector, and to go on doing business in adverse situations like the pandemic lockdown.
We know that gold is one of the most powerful investment assets in the country. Recently, the huge import volume of the metal has strained its value in INR over foreign currencies. This has prompted the RBI to try bringing out gold deposits in homes that lie unused, sometimes for generations. To make this a possibility, the RBI needs reliable and strong channels like banks. These are controlled and regulated by the RBI. According to the central bank, NBFCs cannot be compared to banks, as these make up a very small part of this industry. However, these still need to be regulated from the center.
Are Banks better than NBFCs for Gold Loans?
As gold rates are soaring up, gold loans are becoming lifelines for traders, small businesses, and self-employed & salaried individuals in search of relief from financial troubles caused by the pandemic. When it comes to deciding on a Gold Loan, one of the first calls is to decide on the financial institution - which can be either an NBFC (Non-Banking Financial Company) or a bank.
There are many factors to be taken into consideration before settling on an option, starting with interest rates and value for the gold right up to how safely the gold articles will be kept once they are pledged. When both NBFCs and banks claim to have an upperhand in each domain, how does one come to a conclusion? Here’s all you need to know on how Banks and NBFCs differ when it comes to Gold Loans:
Rate of Interest
Understandably, the amount that will have to be paid as interest is a primary concern for most borrowers. The rate of interest is decided by the lender depending on how much it costs for them to provide the funds. As NBFCs generally cannot draw sizable deposits, their interest rates tend to be quite high when compared to that of banks, who have easy access to much more capital. NBFC Interest rates can be as much as 24-29% whereas for banks, the rate is normally 11-16%. Moreover, banks are also likely to offer preferential interest rates for their existing customers.
The Loan to Value (LTV) Ratio
Loan to Value is the loan sum you can get for a given amount of collateral. The maximum such percentage that can be provided as a Gold Loan has been capped at 75% of the value of the gold, by the RBI. For instance, for gold that costs ₹ 10 lakh, you can avail a maximum loan of ₹ 7.5 lakh. However, as mentioned before NBFCs have to stick to a cap of 60% LTV, once again giving banks the upperhand.
Loan Duration/Tenure
Gold loans can provide funds for any kind of financial need. However, they are known to have short tenures, which makes them not qualify as long-term options. Even so, banks generally offer longer tenures as compared to NBFCs. For example, you can get a Gold Loan from HDFC Bank with tenures ranging from 3-24 months, while NBFCs have a maximum gold loan tenure of 12 months. Longer tenures help bring down borrowers’ monthly expense on repayment, which is a great relief when it comes to managing your budget.
Terms of Repayment
Both banks and NBFCs do well in this aspect. The following three options are offered by all lenders in general:
a) EMIs - This is the regular repayment schedule you can opt for on term loans, covering both interest and principal.
b) Interest Upfront – In this, you can pay interest first, and then pay the principal amount at the end of loan tenure.
c) Bullet payment - The bullet payment option lets borrowers repay as a lump sum on maturity; interest and principal together. Although the interest is calculated every month, it is collected only at the end of tenure.
If you choose to get a gold loan from a bank, Overdraft facility also becomes one of the options available to you. If you avail your gold loan as overdraft, interest is calculated only for the amount utilised from your account. It also becomes easy to renew or top-up the loan. As per your expectations, you can choose from any of the above repayment options from a bank.
Easy Processing and Access
In comparison to personal loans and other loans, gold loans are easy to avail and the process is quite straightforward. They are processed quickly, and don't need you to furnish income documents or credit score. So, all lenders manage to provide loans on the same day of application, within hours. A bank can even disburse a gold loan within just 45 minutes, with very little documentation.
Customer service
Responsible and accountable customer service is an important part in the process of availing any loan; as a customer, one might have a number of queries that need to be addressed. While NBFCs do have customer helpline numbers that are available during working hours on working days, banks tend to 24x7 customer service - offering instant solutions to all queries.
Additional Fees
The fine print for a gold loan can have certain charges that are added. It is important to be updated about the terms and conditions to save yourself from unpleasant surprises. Customers prefer to always look for a provider that offers complete transparency in this aspect. Banks generally have low processing rates and such other fees as compared to NBFCs.
Can NBFCs fight back?
All of these are having a serious effect on NBFCs. However, there is a silver lining in this dark cloud. They have more time to develop better financial products. Their market is a niche one, and that means they can reach more of certain sections of the customers that banks cannot. At the same time, they need to sustain their business longer and provide more, and certainly better financial products.
