13 SEPTEMBER, 2019

In case of financial emergencies, gold loans can be of great help. Loan against gold are offered against gold ornaments. The loan amount is dependent on the market value of gold at the time of the application for the loan. Gold loans are further guided by the terms of the Reserve Bank of India. When considering taking a gold loan from us, it is important to have knowledge of certain aspects related to the nature of the loan. Let’s discuss those aspects at length:

RBI guidelines on gold loan

Having a fair knowledge about RBI guidelines on gold loans is pivotal in making informed financial decisions. RBI has set certain parameters for loan against gold of which the foremost is the Loan to Value Ratio (LTV). Gold loans taken for non-agricultural purposes shouldn’t be set at more than 75% of the original gold price. This means that if your gold is valued at Rs.100, you will get a loan of Rupees. 75. RBI also dictates for this LTV ratio to be maintained throughout the tenure of the loan.

Benefits of gold loan

There are several tangible benefits of a gold loan which are as follows:

  • Taking a loan against gold ensures that you are able to derive monetary gain from investment that are locked in the form of jewelry, all of which are never put to use at once
  • These loans are also processed faster because the RBI has set the process of gold valuation to the average of the last thirty days. This rule has been put in place by the India Bullion and Jeweler’s Association Limited
  • Even if you do not have the most impressive credit history, as is required in case of sanctioning of most other types of loan, having gold ornaments to your name will get you the loan
  • Repayment options on these loans are also flexible because they are allowed for miscellaneous purposes and can have either monthly payment option or bullet repayment. Bullet repayments are done at the end of the term of loan because cash inflows don’t have to match cash outflows

Risks of availing gold loan
While gold loans are the easiest available ones, most lenders deem it necessary to inform you about the risks associated with it. The foremost risk is the volatility of the value of your underlying security, which in this case, are the gold ornaments you mortgage. It is considered volatile because the RBI directs finance institutions such as private banks to maintain the LTV ratio of 75% throughout. Therefore, a decrease in market price of gold may propel banks to sell the jewelry off to repay the loan. Although this situation is highly unlikely for gold prices have only risen with each passing year, you may avoid such a state by repaying the proportionate amount in time. So, gold loans could be your ideal resort in times of urgent financial needs.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.