Gold Loan - Banks or NBFC
Gold loan are generally short-term loans, with a maximum tenure generally for twelve months. So you must borrow only if you are sure you can repay during this term. Else, your gold may be auctioned by the lender.
Bank Vs NBFC
- As both banks and NBFCs offer gold loan, comparison of rates, eligibility rules and loan amounts offered by them is important.
- Now, the question is that in case of an urgent need for funds, should you go to a bank or to an NBFC loan for gold? when it may be an emergency, your convenience is important.
- Apart from it, we must evaluate the interest rates, additional charges and the disbursal time. Usually, the loan process happens not more than 60 minutes. Hence, it leaves us with interest rates and other charges as the deciding factor.
- Banks hold right of entry to low-cost deposits in accounts.
Loan-to-value
- The RBI decides how much loan can be issued as a share of the gold’s worth. Right now, NBFCs cannot offer more than 60 percent.
- Earlier, there was not such restriction and normally NBFCs used to offer up to 80-90 percent value of gold pledged.
- This means on jewellery value Rs 5 lakh, you may currently get Rs 3 lakh from an NBFC, against Rs 4-4.5 lakh earlier.
Interest rates
- Despite collateral, NBFCs charge very high rates when compared to a bank.
- For banks, the interest rate is 12-16%; for NBFCs it is 14-26 percent consider checking additional costs such as the processing fees, which will be 0.025-1.5% of the loan amount.
Banks retain edge over NBFCs
- Besides the rate difference, you will get a larger amount for the same amount of gold. For example, gold jewellery of Rs 1,00,000 will acquire Rs 60,000-62,000 from a bank, while an NBFC will offer Rs 55,000-57,000 intended for the gold transacted.
- Since all the banks and NBFCs will take away making charges, usually 10-25 percent, before giving an LTV of 75 and 80-85 per cent, respectively.
Drawbacks with NBFC
NBFCs lend and make investments and hence their activities are parallel to banks however, there are little differences like,
- NBFC cannot accept demand deposits;
- NBFCs do not constitute element of the compensation and settlement system and cannot provide cheques drawn on itself deposit insurance provision of Credit Guarantee and Deposit Insurance Corporation is not available to depositors of NBFCs, unlike banks.
- Banks/NBFCs with significant exposure to gold loans could face widespread defaults, which could adversely impact the economy.
Verdict
If one is looking to borrow for a year, it’s suggested to borrow from NBFCs, as they can charge 12 percent. Whereas if it is for two-three years,one may borrow from banks as long-term rate outlook indicates RBI could lower interest rates soon.
The longer-term loan charges from NBFCs are way higher than bank rates up to 25 percent for three years.
Hi Ankita. Thanks for the information. I have few questions:
1. How do drawbacks (points 1 and 2) mentioned for NBFC affect the borrower? Can you through some light on demand deposits?
2. Are these loans collateral free upto a certain limit?
3. How will the loan pass before the borrower buys the gold? Will the amount get credited beforehand?
I think anybody smart would go straight to a bank for a gold loan. NBFCs can be very risky. I just wonder - if your gold is not returned in perfect condition after the tenure of the loan, can you get insurance to cover this damage? How would you go about rectifying any damage that may have occurred during the loan?
NBFC’s seem to be a good option to extract more money on loan, as compared to banks. I think any rational person would do that. However, the interest rate is something to consider, as it is higher. I think, given an option, I’d go for the NBFC if I was sure that I can pay up the amount in a shorter period of time.
NBFC’s are good option for a year otherwise borrowing from bank is safe. The interest rate is higher for both even when a collateral like gold is being kept as security. The loan is being given on half or one third of the value of gold kept. Why is it so?