Banks not offering loans for gold purchase

In India it is a festival time and the celebrations are on full swing new clothes to buy, new appliances, even buying a new car. At this time banks also promote gold coin purchases at bank branches. But most of the banks have not included loan offer for purchasing of gold or gold jewellery in their portfolios.

However Indian Overseas Bank and Corporation Bank are offering loans to purchase gold and platinum jewellery, some banks like Canara Bank are offering discounted loan offer for purchases.

According to industry experts these products are not consumer friendly. "Banks currently offer loan for gold purchases to only government employees or those who have a salary account with them. The loan is available only for buying gold bars, not jewellery," says Keyur Shah, associate director of the World Gold Council.

Though the World Gold Council is having talks with several banks and national gold jewellers for making available gold purchases via equated monthly installments (EMIs).

"In times of volatility and global crises, gold jewellery purchases on EMI would be beneficial. We have been talking with banks and national players to offer gold on EMI," says Shah.

He raised a question, "Affordability is a factor in gold purchases. When loans are available to purchase consumer durables, home, etc, why not for gold?"

Bankers stated that high risk is involved in the yellow metal. An anonym’s bank official stated, "The prices are volatile and, in case the person defaults, it is not as easy to recover a gold asset as it is to recover a home or vehicle."

But Shah is not convinced about this. He added, "If security and risk can be taken care of in the white goods industry, it can be taken care of in the gold industry as well".

Jewellers pointed out that they haven't seen too many purchases by takers of gold loans as the loans are not consumer friendly.

"Banks have restrictions for offering gold loans. Unlike a personal loan or a consumer durables loan, a loan for buying gold jewellery is not sustainable. Unlike a television, which sees a significant drop in value once it is purchased, in the case of gold, the value may even increase after it's bought. Gold is a liquid asset and can be moved and so structuring a product may not be possible," says V Govindraj, VP, integrated retail services at Tanishq.

To get a gold loan, for amounts beyond Rs 50,000, a security such as LIC policy, Kisan Vikas Patra, National Savings Certificate has to be kept with the bank. Therefore if you are looking for taking a loan of Rs 1 lakh, up to Rs 50,000 it will come without security and a security has to be submitted for the balance Rs 50,000.

However jewellers themselves have found an easier way, which operates like the loan facility. Rajiv Popley, director of Popley Group, says, "We have been offering the EMI facility for gold purchases for the past five years through credit cards. We have a tie-up with Citibank and ICICI Bank, under which the EMI facility can be utilized. Most people take this facility."

"There is no down payment required and the interest charged is 0% for three months," explains Popley. "Buying gold is a spontaneous decision and the EMI on credit card facility can be utilized in seconds, while the bank loan is a tedious process. No one would undergo a tedious process when the shopping is spontaneous," he elaborates.

Nevertheless, the EMI on credit card facility that many people are using for gold purchases might not be as low-cost as it appears. Banks are usually charging an interest rate of around 1.5-3% per month, as well as the processing charge for the EMI on credit card facility. Therefore, for a six month EMI option, you will end up paying around 8-9% more than the purchase price. In this world everything has price.