How Are Non-Banking Financial Companies(NBFCs) Keeping Up With The Gold Loan Demand Surge?
Gold has a strong emotional connection for Indians, who tend to accumulate large amounts of yellow metal, it has been a tradition for generations to pass on gold as inheritance and it is also considered a form of savings for tough days. As per the World Gold Council Indian households hold at least $1.5 trillion worth of gold that too in the form of jewellery. The love for gold is not limited to rural areas and is prevalent across urban areas too. Hence, investing in gold is considered a safe and secure option for Indians, which makes it a significant part of their investment portfolio.
What is a gold loan
A gold loan is a secured loan in which gold jewellery is provided as collateral security. In India, gold loans are provided by nationalised public banks, private banks and other financial institutions like Non-Banking Financial Companies at affordable interest rates. Compared to other loans that stipulate some fixed terms and conditions for end uses of funds, the gold loan provided flexibility to borrowers to use funds for any purposes like education, wedding, business, medical emergency and so many others.
Reason for gold loan demand surge
Gold holds a significant value in India, representing wealth and status. Historically, gold has been used as a means of last resort in times of need. However, with the COVID-19 pandemic causing unemployment for millions, many Indian families have had to rely on their personal gold reserves to alleviate financial burdens. As a result, there has been a notable increase in the demand for gold loans, particularly among the low & middle class, who view gold as a preferable source of credit over a savings instrument. Listed below are some other reasons for the gold demand surge:
1. Gold prices rise– During and after the Covid pandemic the gold rates increased dramatically and it was the time when people were in a deep financial crisis too due to various reasons. The increased value of their gold encouraged them to use their gold and pledge with banks or NBFCs to fulfil their short-term financial requirements.
2. Easy availability of funds for start-ups/small businesses– The gold loan has an open opportunity for those who are planning to start their online/small business. Pledging their gold, they can arrange the finance themselves. A gold loan is the biggest financial assistance for all those projects that were pending so far.
3. Quick access to funds- Easily accessibility of funds is the main reason people apply for gold loans. You need not get worried about low credit scores. While comparing it with a personal loan, Gold loans are available easily at a low-interest rate by pledging your gold as collateral security. Many lenders provide lucrative offers from time to time in terms of interest rate, loan amount along with processing fees.
4. Job loss– During covid-19 pandemic many people lost their job. In this unemployment period, they were in need of funds for some medical emergencies or many people switched to start their own businesses or it was needed just to fulfil their routine requirements. At that time applying for a gold loan was the safest option left for them. It is the one secured loan financial option with minimum processing time and available at a low-interest rate with quick disbursement.
How Are NBFCs Keeping Up With The Gold Loan Demand Surge?
NBFCs are responding to the rising demand for gold loans by offering digital platforms, secure storage solutions, streamlined loan processes, and competitive pricing. These measures aim to provide customers with convenient and secure gold loan options. Some key steps taken by NBFCs are discussed below:
1. Creating awareness for unused gold- NBFCs are making the public aware by providing loans from their unused gold. Raising funds against gold is a better utilisation of unused gold for people who are in need of immediate financial assistance for various purposes.
2. Providing better loan opportunities- NBFCs are providing competitive interest rates and margins to their customers as compared to nationalised banks. This is attracting more and more new customers to take a gold loan from them.
3. Provide insurance to collateral and borrower – NBFCs are providing insurance to the gold pledged with them along with they are also covering the respective borrowers. However, for this they usually charge some nominal insurance premium from the borrower only.
4. Flexible period- NBFCs provide flexible loan tenure to repay the gold loans which can be as low as 3 months to as high as 24 months. A borrower can choose the tenure based on their need for funds and paying capacity.
5. Faster loan processing- NBFCs are making financial assistance against gold easier and faster than Banks. They provide a seamless experience to their customers. Many NBFCs provide instant approval and same-day disbursement to their customers at the best interest rate.
Advantages of applying for a gold loan with NBFCs
1. Quick processing:– A hassle-free and transparent gold loan procedure with minimum documentation and fast loan processing are key differentiators for an individual while applying for a loan to any NBFC.
2. Option in interest payment:– Non-Banking Financial Companies provide easy repayment options to their customers when offering a gold loan. One of the most popular ways to pay the interest only. Under this, a borrower can pay only interest during the loan period and the whole principal amount of the loan at maturity. They also provide an option to repay the loan in EMIs. However, nowadays many Banks are also giving this flexibility to their customers.
3. Nominal Processing Fees:- While compared to any other loan offered by NBFCs, processing fees charged by them are nominal in the case of gold loans. This also encourages the borrower to opt for gold loans while applying for the loan.
4. Minimal foreclosure fees: Borrowers can prepay their loan before the loan tenure maturity at minimal foreclosure fees. Many NBFCs allow the same with minimal or no pre-payment charges. However, there may be criteria for minimum loan tenure from the disbursement date.
5. No income proof:- Many people do not file income tax returns due to this they are unable to take loans from a Bank. However, many NBFCs do not ask for any or minimum income proof to sanction and disburse gold loans to their customers.
6. Offer the best security of physical gold:- NBFCs provide gold loans at the minimum margin. Pledged gold is fully secured and insured by Non-Banking Financial Companies. That means you can be worry-free and that your gold is kept safe with the company.
During Covid banks have also started focusing more on gold loans as gold loans are secured and can be liquidated quickly if require compared to other products which bank have and faced issues during Covid. Post covid banks are giving tough fight to NBFCs which have reflected in large gold loan NBFCs growth and profit numbers. It will be interesting to see how NBFCs will grow their portfolio against tough competition from banks.
Frequently asked questions-
Whether a loan against household gold is possible?
Yes it is possible to raise loans against household gold, many nationalised banks and non-banking financial companies finance loans against gold.
Whether gold pledged with a non-banking financial company is secured?
Gold kept with NBFCs is fully secured. In fact, they offer and provide insurance also to cover any contingent losses to the borrower as well as to recover their loan.
Whether the prepayment option is available in a gold loan?
Many NBFCs provides prepayment options for the gold loan. A borrower can pre-pay their loan if they have an excess of funds. However, it is always advisable to check if there are any prepayment charges to do so.