RBI: Gold Loans Are To Be Repaid, Not Renewed; What Are The Alternative Loan Options?

The banks have given strict instructions to their branches that gold loans availed of by the customers should not be renewed or upgraded, and just repaid or closed. This move comes after the Reserve Bank of India (RBI) advised gold loan lenders to stick to regulatory norms as they tighten control over non-banking financial companies (NBFCs). After it found certain NBFCs to be breaking the rules, the RBI increased its scrutiny of NBFCs. After the firm was found violating lending norms, in March, the RBI banned IIFL Finance from issuing fresh gold loans. “RBI as regulator has a tough job to do. They have to help in making the credit availability process easy and also check that lenders are following norms laid for their betterment. A tough job to balance. So when they made it clear to the gold loan lenders to close the previous loan first before giving new credit, there were questions to be answered,” Madhupam Krishna, Certified Financial Planner (CFP) and Sebi RIA, chief planner, WealthWisher Financial Planner and Advisors, a financial planning and wealth management firm said.

In India, until now a few NBFCs have been flouting the lending norms in the case of gold loans. Suppose you, as a customer, go to an NBFC and use your gold jewellery as collateral for a loan. The lender values it at Rs 1 Lakh. They offer you 75 per cent or Rs 75,000 as a loan. Now you just need to pay equated monthly instalments (EMIs) and get your loan back at the end of the tenure. So far so good; everything is within the rules.

But here comes a smart investor into play. After two years of EMIs bouncing and irregular payments, the lender approaches the customer to repay the loan. The investor said, “Now since my gold is worth Rs 1.6 Lakh, you should give me a further loan of Rs 45,000 (75 per cent of the increased value of Rs 60000).”

Lenders sometimes assume that they have 100 per cent of the collateral, believing its value never decreases. They also boast good liquidity for lending purposes. Moreover, They sweeten the deal for themselves stipulating that the borrower must agree to use a portion of the new loan amount to pay back at least the interest from the previous loan. This effectively portrays the defaulter as a good customer on paper.

But what if you want a loan for a genuine reason?

What Are The Alternative Loan Options: The guideline itself does not say – not to extend the loan. The best way to close is to prepay the existing loans first and then based on the new valuation of gold as collateral apply for a new one.

“Sometimes, this alternative may not be possible. So one can always look for various other types of secured loans like property mortgage loans, and loans against securities (mutual funds, shares & insurance policies). If you have a good credit score you may also try for a non-collateral loan like a personal loan or business loan,” Krishna said. 

“Loans without collaterals (unsecured) will always have a higher rate of interest and a stringent approval process. Based on your previous credit history, subject to eligibility & availability of documents these alternatives can be availed. We would not recommend very high rate-bearing solutions credit cards or taking money from unregulated money lenders,” Krishna added.