If you are thinking of taking a loan against gold, you should know that it is the Unorganized sector that dominates the gold loan market in India. The situation at banks has been less intense. This is because the regulations for the loans ensure that the Loan-To-Value (LTV) ratio remains lower throughout the tenure of the loan. This provides more Why Gold Loans From Banks Or NBFCS Is The Better Choice To Grow business need to.
Unorganized sector dominates the Indian gold loan market
NBFCs are a key player in the gold loan market of India. These organizations have been expanding their market presence with focus on improving service quality, reducing interest rates, and carefully monitoring lending practices. Their growth has outpaced that of the banking sector in recent decades. The organized sector of gold loan is growing at a robust 15.7% CAGR. Banks are the preferred option for people, who can avail gold loans at competitive rates. However, banks are not the only option, as they compete with Moneylenders, which charge high interest rates.
While the organised sector was not affected by the financial crisis, it suffered as a result of a heightened cost of borrowing. Regular loans became harder to obtain, and banks lost business. The unorganized sector, with its limited scale and lack of digital backing, was hit harder by the crisis, forcing many to shut their doors. Despite the difficulties facing banks and NBFCs, the organised sector continues to grow, and is boosting its presence in rural India.
The demand for gold loans is driven primarily by the lower middle class, who earn 13,000-fifteen thousand rupees annually. While the organised sector is slowly becoming a larger player in the gold loan market, the unorganized sector continues to dominate the market. NBFCs have also expanded their services due to a rise in the number of repeat customers, as they tend to have fewer bad debts and a strong banking sector.
Improve Access to Credit for MSMEs
The demand for gold loans in India continues to grow strongly, and it is expected to surpass $46 billion in 2022. In fact, the organised gold loan industry in India is estimated to be worth INR 3.5 trillion, or 7% of the overall personal loan market. A gold loan can be a great way to restart a business after lockdown. The downside to acquiring formal credit from a bank is that the process can take a long time.
Demand for gold loans from micro enterprises
While demand for gold loans has waned for the past few years, lenders are likely to remain cautious as prices decline and other retail asset classes grow. This trend should continue, as a rising gold price should drive a re-pledge demand from micro enterprises. However, there are several factors that are hindering this growth. In this article, we’ll discuss some of the important aspects that will likely affect demand for gold loans.
Small and medium enterprises make up a large percentage of gold loan customers. Traditionally, MSMEs borrow against household jewellery to obtain cash for their operations. Today, the government is seeking to promote the mobilisation of privately held gold and improve access to credit for MSMEs. As part of this effort, it should give small gold loans PSL status again. The government should consider this option when assessing the future gold loan market. Here are some other factors to consider.
Increasing gold prices will help gold financiers. As gold prices continue to rise, customers will increasingly use gold loans to raise cash. Furthermore, an increase in gold prices will give a modest boost to the economy. With this, the industry should prepare for a bigger wave of demand in the coming years. According to a recent KPMG report, gold loan demand will reach INR 4,61,700 crore by 2022.
With the pandemic and uncertain macroeconomic conditions, gold’s position as a safe haven has strengthened. This has benefited the gold loan industry, allowing borrowers to meet their credit needs even when their business is struggling. Moreover, banks and NBFCs have also been cautious in lending, in an effort to protect their balance sheets. The growth in demand for gold loans has increased along with the overall economic activity.
Short tenure of gold loans
Getting a gold loan from a bank or an NBFC is the quickest way to obtain funds for your precious metal collection. These loans are short-term and require the applicant to deposit their gold with the bank or NBFC. However, gold loans from banks and NBCS are not recommended as the loan tenure is short and the quality of gold may be compromised if it is obtained from a rogue source.
NBFCs have the advantage of flexible repayment options and do not charge a prepayment penalty. The main disadvantage of a short-term loan is that the interest rate is high, resulting in a higher repayment burden. Banks and NBFCs should make their gold loans as simple as possible so that the customer experience is positive. They should consider the following factors in evaluating whether to choose a bank or an NBFC as their gold loan provider.
NBFCs do not require a credit score for gold loans, and are therefore suitable for students as well. Banks charge lower interest rates than NBFCs. For example, HDFC Bank charges 9.9 percent interest on gold loans compared to 11.0% for personal loans from banks. And, Muthoot Finance charges as low as Rs. 1,500. NBFCs do not require any income proof, but they do require collateral such as gold jewelry.
Although banks and NBFCs offer a lower interest rate than public sector banks, their repayment terms are shorter than a bank loan. Short tenure gold loans from banks and NBFCs come with higher fees, but they offer lower interest rates than unsecured loans. You will also have to pay a processing fee, which is around 1.5 to 2.5% of the principal loan amount. Once you’ve paid the money back, you will have to pay off the interest and pay off the principal.
Currently, it is difficult to judge whether gold loans from banks or NBFCS are better options for business growth. Gold loan companies have high interest rates and high fixed costs. NBFCs can compete with banks if they maintain their credit profiles, are able to meet minimum capitalisation requirements, and have solid asset quality. However, as more gold loan companies enter the market, their terms are likely to improve, and the banks will ask for a piece of the action.
The interest rate for gold loans depends on the risk assessment of the lender. This rate may be as low as 7 percent per annum, depending on the LTV ratio (loan-to-value ratio), loan tenure (LTV), and loan amount. To find the best loan option, borrowers should compare rates from several banks. Banks often charge a processing and valuation fee, which can amount to about 1% of the loan amount. on the other hand, do not charge this fee.
with a focus on gold loans have aggressive marketing strategies that may hurt the bottom line. Now with this approach are likely to offer loans with lower yields, thereby affecting the operating performance of the business. In addition, these lenders are likely to offer flexible loan terms, which can affect the cash flow of the business. In short, banks are often the better choice for growing business.
While NCDs are not 100% risk-free, NBFCs with good credit are following SEBI standards and are able to offer attractive interest rates. Historically, NCDs have served as a safe instrument for the expansion of NBFCs. In fact, NBFCs dealing in gold loans saw the lockdown as an opportunity to grow. If you’re thinking about a gold loan, the time is now.
Cost of funds
Banks have tended to shy away from aggressively promoting gold loans because they tend to have higher operational costs. These loans are secured, run for a relatively short period of time, and require infrastructure to store and appraise gold, which can add to the operational costs. However, these costs can be lowered by using high ticket loans, like gold loans from banks or NBFCs. But how much does it cost to borrow gold?
Banks charge 14-16% annual interest on gold loans and also charge a 1-2% processing fee. Interest rates are calculated on a diminishing balance basis. The cheapest gold loans from banks are generally around Rs 1 crore. Most banks charge a one-to-two-per-cent processing fee and are more expensive than those offered by NBFCs. However, you will have to bear the cost of the processing fee if you are borrowing a large amount.
One of the benefits of a gold loan is that it automatically raises the value of gold. This increases the demand for gold. The underlying cash value of gold is equivalent to that of the gold loan. Moreover, people across India have a traditional affinity for gold ornaments and are emotionally attached to family heirlooms, which acts as a further deterrent to defaulting on repayment. This makes gold loans a more favorable option than other forms of commodity lending.
Another advantage of using NBFCs over banks is their greater flexibility. In recent years, NBFCs have lowered their interest rates, allowing them to lower disbursement LTV. Furthermore, borrowers are more likely to redeem gold loans from NBFCs if the price of gold continues to rise. However, there are risks associated with using these institutions. In the meantime, it is worth looking for banks that offer a higher rate of interest on gold loans.