A gold loan is a credit provided by accepting gold ornaments or bars or coins as a collateral from a customer. It is fully secure kind of loan where gold is taken as a collateral and a part of the value of gold is sanctioned as the loan amount and Gold Loan Software which understands the technological needs of a complex loan product like gold loan & the needs of the jewel finance sector. Gold Loan Software has enhanced in operational efficiency with optimization of the business process. The amount of loan to be disbursed is decided on the basis of the source of income and repayment capacity of the applicant.
A gold loan is a win-win for both the borrower and the lender. From the borrower’s perspective, once the loan is repaid, the entire gold kept as the collateral returns back intact. From the lender’s perspective, if the loan is not repaid on time, the gold can always be sold on the market for recovering the outstanding amount.
Traditionally, Indian households have always held gold in the forms of ornaments. However, in most cases, they remained idle in vaults apart from occasional usages in various kinds of functions. The fact that the idle gold can be used for meeting various expenditure needs became an extremely popular concept.
What is the process involved?
The most convenient thing about gold loans is that it is instantaneous. Since there is a physical collateral involved, banks and NBFCs relax the due diligence process and hence release the loan quite fast. Let us list down all the aspects involved in taking a gold loan:
Banks provide gold loan taking gold ornaments as collateral. NBFCs, on the other hand, can only take gold jewellery as collateral. The purity of such gold needs to be between 18 to 24 carat. The bank or the NBFC in question will be coming to a value of the total quantity of gold to be pledged and only a part of the same is given as a loan. The percentage of value that can be given as a loan varies from organization to organization. The amount is decided by RBI and is revised from time to time.
Repayment of loan:
A regular amount has to be paid by the customer per month as is the case with all the other loans. For NBFCs, the borrower has to pay only the interest month on month. The principal can be paid at the time of closing the loan. However, in the case of banks, it works like a normal loan where EMI consists of principal and interest. In almost all the NBFCs, prepayment can be done without paying a penalty. However, in the case of banks, this facility is not available.
In case of default, reminders are sent usually after 3, 6, or 12 months. If payment is still not received, the gold is melted and auctioned to recover the amount. However, this is treated as a last resort.
The interest rate varies from lender to lender. It is usually a bit lower in the banks than NBFCs. However, obtaining a gold loan from banks is a longer and more stringent process than obtaining loans from NBFCs.
Most useful for short-term fund requirements:
The best thing about a gold loan is that the amount of loan does not depend on a person/business’ income but on the valuation of the gold being pledged. Hence for short-term requirements like house renovation or medical emergencies, this type of loan is ideal. Moreover, in the case of gold loans, the due diligence process is more lenient and less tedious since there is a collateral involved.
Hence, emergency fund requirements don’t have to wait for the completion of documentation and repetitive due diligence process. Finally, since there is a collateral involved, the interest rates are a bit lower than other loans without collateral like personal loans.
Gold loans are a hassle free, less time-consuming alternative to fund business decisions and move ahead in life.
What are the challenges institutions face?
The gold loan process is definitely easier than processing other loans, but it is definitely not free from challenges. Institutions which are involved in the business face a number of challenges in today’s business environment.
Previously, NBFCs could lend out 75% of the value of gold as a loan (Loan to Value). This resulted in the gold loan being the loan of choice for many a business. NBFCs dealing with the product increased their valuations in the market. However, this also resulted in fluctuations in the gold rate, which is a major factor affecting the economy of the country.
To begin with, RBI brought down the 75% to 60%. A 15% reduction in Loan to Value meant that profit opportunity came down. Hence, the cost had to be managed smartly. This meant that only those operators which could manage cost and had a robust operating system could only play in the field. Lending yields fell and so did profitability. Due to this, the smaller players in the industry vanished slowly yet steadily.
Variations in gold prices:
Gold prices is a world phenomenon and companies engaged in gold lending are obviously exposed to the same. Gold prices have been fluctuating with a downward trend since 2012. Variations in gold prices mean that operators have to depend on the number of tickets for bringing in profitability, rather than the quantity per ticket.
However, the increase in a number of tickets means more document processing, more operation, and employment of manpower. However, the profits do not justify the costs need to be incurred for the above-mentioned activities. This is like a double edged sword for the operators of the industry.
When it comes to gold loans, though there are fixed EMIs a large number of customers tend to make part payments to close the soon and retrieve the jewel which is pledged.
A few customers who don’t have the financial ability to completely pay off the loan may just choose to pay the interest and repledge the jewellery to be retrieved at a later date. This calls for a separate feature that would restructure the repayment as per need.
In case of unavailability of flexible repayment options, there might be chaos when we try to tally the numbers. Using a different software or just a spreadsheet to manage the backend accounting might lead to even more complications and potential for fraud as the data protection aspect could be compromised in the havoc of different pieces of information listed across various sites.
The requirements of a gold loan product and providers are usually quite different from those of other loan products. The predefined repayment reports which provide information about EMIs paid every month may not be feasible as they may need to know the number of repayments done on a daily basis.
There might be no need for a credit verification process as there is a collateral involved. But managing a volatile product like this may need an inbuilt capability to the fluctuation Gold prices to raise alerts when the Loan to value to breached and maintaining storage records of the Gold. The documentation aspect may differ from other loans seeing as how this product involves capturing details of the pledged gold jewellery.
All these challenges call for a tailor-made gold loan software like Finabile, which is a prominent loan software used by top lending institutions around the world.
Why Finabile for Gold Loan Software?
Finabile is a tailor-made solution for gold loan software configuration. With its intuitive design that caters to the technological needs of a complex loan product like gold loan understands the needs of the jewel finance sector completely. An integrated accounting software helps financial institutions to manage their gold loan accounts with ease. Here are the key benefits of using Finabile as the primary gold loan software:
- Single point for Borrower Data capture with customer details, financial records, jewel information, and interest schedule, etc.
- Tracking the inventory of pledged items and customer information is easy with the intelligent document capture mechanism
- Automated penalty capture aspect which recalculates interest on overdue loans
- Flexible interest and repayment options with auto calculation abilities would ensure the reduction of manual transgressions
- Integrated accounting feature coupled with options to re-pledging the jewel and making an auctioning entry can eliminate the need for a different accounting management software
- Provisions to change Gold prices and recalculate the loan terms based on them reduces a huge load of manual calculations done by financial institutions
- Unique, customizable, and user-friendly reporting structure available in 4 different formats could be used to churn out necessary reports in seconds
- Prevent potential frauds with the audit trails that list out modification details clearly
Register today to maximize your profit by reducing manual work and improving the productivity and efficiency using our complete gold loan software.