Gold Loans - Banks retain edge over NBFCs

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Despite RBI allowing NBFCs to offer 75% loan- to-value, banks score on rates

For gold loan borrowers, its a trade- off between convenience and rates. While non- banking financial institutions (NBFCs) such as Muthoot and Manappuram offer loans within minutes, lenders such as HDFC Bank take 24- 48 hours to sanction these. And, in the case of the latter segment, disbursement could take a few more days.

However, while banks charge 15- 16 per cent, NBFCs tend to charge 17- 18 per cent or more. Though the lowest rate for NBFCs is 12 per cent, these companies seldom offer loans on that interest rate. Usually, NBFCs levy arate higher than that levied by banks for gold loans because NBFCs source the funds from banks. Even if NBFCs say they offer a lower rate, they may not be able to offer rates less than banks. Banks have an edge in the loan- to- value (LTV) aspect as well; they provide LTV of 8085 per cent. Last week, the Reserve Bank of India allowed NBFCs to give up to 75 per cent.

So, borrowers in a rush to raise money and for the short term may opt for NBFCs, albeit at a marginally higher cost and lower LTV. This is because a two- three per cent difference between the interest charged by banks and NBFCs will mean little for loans with tenures of up to a year. If you take agold loan of ₹ 1 lakh gold loan for a year from a bank, equated monthly instalments (EMIs) would stand at ₹ 9,026. From an NBFC, the same loan would result in EMIs of ₹ 9,168, a difference of ₹ 142 a month.

If planning to take a gold loan for a few years, say, for funding a childs education or any other important financial goal, you could approach a bank. If one is looking to borrow for a year, its suggested to borrow from NBFCs, as they can charge 12 per cent. But if one is looking to borrow for twothree years, one may borrow from banks as long- term rate outlook indicates RBI may lower interest rates soon. The longer- term loan rates from NBFCs are way higher than bank rates — up to 25 per cent for three years. Besides the rate difference, you will get a larger amount for the same amount of gold. For instance, gold jewellery of ₹ 1,00,000 will fetch ₹ 60,000- 62,000 from a bank, while an NBFC will offer ₹ 55,000- 57,000 for the gold. This is because banks and NBFCs will deduct making charges, usually 10- 25 per cent, before giving an LTV of 75 and 8085 per cent, respectively.

The rate of interest depends on the LTV — if the LTV is high, a gold loan company may charge additional interest, which is seen as the risk premium for offering a higher loan against gold. In other words, to secure comparatively lower interest, one should seek a low LTV.

 

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