Gold loans: You may soon have equated monthly installment plans to pay back loans to avoid irregularities

Gold loans: Banks and gold loan companies are looking to implement monthly amortisation plans following concerns raised by the Reserve Bank of India (RBI) regarding deficiencies in gold loan disbursements. According to a report by the Economic Times, borrowers may soon be required to begin making interest and principal payments through EMIs immediately upon loan approval. The RBI's scrutiny on September 30 shed light on irregularities in lending against gold ornaments and jewellery.

In addition, lenders are considering using term loans to provide financing secured by gold. Previously, gold loan lenders offered a bullet repayment option where the borrower could repay the entire loan amount at the end of the term, rather than following a fixed EMI schedule. 

Borrowers also had the flexibility to make partial repayments whenever they had available funds, allowing them to settle the principal and interest before the loan term ended. 

In a circular dated September 30th, the Reserve Bank of India highlighted discrepancies in the approval of loans backed by gold ornaments and jewellery. The central bank identified issues related to the sourcing, valuation, due diligence, end-use monitoring, auction transparency, loan-to-value (LTV) ratio oversight, and risk weight application in the gold loan process. Additionally, the regulator identified deficiencies in the practice of extending gold loans with partial payments.

Gold loan providers commonly offer a bullet repayment option, allowing borrowers to repay the full loan amount at the end of the tenure without following an EMI schedule. Alternatively, borrowers can choose to make partial repayments as funds become available, settling the principal and interest before the loan term concludes.

"The regulator's diktat is clear, it wants lenders to examine the payment capacity of borrowers and not solely rely on the collateral," said a senior banking official told ET. "It is also unhappy with allowing rollover of such loans with part payment, which could lead to some delinquencies when repayments come up. We are now structuring monthly payment options for gold loans," the official added.

Demand for gold loans

Gold loans provide a secure way to borrow money, as they are backed by your gold assets. Failing to make timely repayments could put your gold at risk. It is important to repay your gold loan on time not only to protect your assets but also to build your credit score. Missed payments can negatively impact your credit score and may result in the loss of your assets.

The demand for gold loans has seen a significant increase recently, driven by rising gold prices and limited access to unsecured credit. In September, the gold loan sector experienced a remarkable 51% growth, surpassing the 11.4% growth in personal loans. Despite this growth, it is important to note that the gold loan market is still relatively small, accounting for only 10% of the personal loan market. Currently, the total value of gold loans stands at Rs 1.47 lakh crore, while personal loans amount to Rs 14.27 lakh crore.

Over the past few years, there has been significant growth in the gold loan sector. According to a recent report by ICRA, organized gold loans offered by banks and NBFCs are expected to surpass Rs 10 lakh crore in the current fiscal year. The report predicts that this number is likely to rise to around Rs 15 lakh crore by March 2027.