An interest-free gold loan that’s catching the eye

Three years back when the Centre had strict regulations on import of gold and the metal was in short supply in the country, jewellers offered ‘cash-for-gold’ schemes.

To incentivise people to trade in their ‘old’ gold, jewellers were even offering ₹50-100 per gram higher on the old gold.

Today, even as most restrictions on importing gold stand removed, jewellers are still in trouble. The domestic market price of gold is 2.5-3 per cent lower than international prices as demand remains lacklustre.

Jewellers, who source gold from importing banks, buy at a higher rate as banks follow the London Bullion Market Association (LBMA) prices. This gold, however, has to be sold at a lower price, of almost $30-35/ounce, in the market.

To work around this problem, a Chennai-based jeweller has come out with an innovative idea — ‘interest-free gold loan’. This loan, called GL Plus, is a product of the consultancy company Gold Concepts and is now available only from KFJ (across its four branches in Chennai).

If the concept clicks, many other jewellers too may offer it, either through partnership with Gold Concepts or by themselves.

Many customers who feel short-changed when borrowing against gold, with the lenders charging high rates of interest, are now going for GL Plus, say market sources.

For the weight of gold that is pledged, the jeweller gives 70 per cent as loan, which has to be repaid in a year (or in 24, 36, 48, or 60 months), and there is no interest on the loan.

Say, you pledge 10 gm, you will get a loan for 7 gm, and you have to repay the price of about 0.58 gm worth of gold every month for 12 months. Your monthly instalment will vary depending on the price of gold that month.

So the price risk is yours — if the price of gold goes up, your instalment amount will increase, and if the price falls, you will benefit.

But what must be noted is, after you finish repayment, you will have to take new jewellery for the same weight you pledged from KJF, and won’t get your same jewellery back.

The jeweller will melt your gold and use it once pledged. There will be no making or wastage charges on the new jewellery that you buy (provided your loan tenure is for a period of more than a year).

Does this sound too good to be true?

When gold loan companies lend at 18-21 per cent interest per annum and banks lend against gold at 11-17 per cent, a jeweller coming forward to lend against gold for zero interest raises eyebrows. But a closer look at the numbers shows that the jeweller is not at a loss.

KFJ charges a processing fee of 1 per cent. The loan value on the pledged gold is decided after weighing it once stones are removed (there will also be a melting charge — for loss of gold on melting).

But the deal is still good for the jeweller as it gets to use your gold for its business and the monthly instalments you pay also add up as working capital.

Currently, most jewellers rely on banks for the gold they need. Banks give six months credit to jewellers buying gold through them (gold metal loan) for an interest rate of 3-4 per cent.

But as jewellers also have to take a bank guarantee and maintain a mandatory deposit, their cost of sourcing gold from banks goes up. Then, if the domestic market rate is lower than the bank rate, the jewellers face loss on the price too.

So, from a jeweller’s standpoint, rather than buying from a bank, gold, if sourced from the customer, saves money. Also, the portion of the pledged gold that it keeps as safety deposit (30 per cent of the pledged weight of gold) is a bonus as it is used for the entire tenure of the loan without any interest. However, do note that the benefits of GL Plus may come only if the borrower sticks to his repayment schedule. If he pre-closes the loan before one year he will have to pay for the wastage and making charges for the new jewellery.

There is hardly any domestic supply of gold. According to one report, mine production and recycled old gold account for just 10 per cent of the supply in the domestic market; the balance is met by imports.

India’s gold mines produce very little compared to the annual consumption of 800-900 tonnes. The only source thus is the gold auctioned on defaults by gold loan borrowers.

But this again is not much. It is just 1-2 per cent of the portfolio of NBFCs, says a the 2013 report from RBI. If the Centre sees some success in its Gold Monetisation Scheme, it could boost domestic supplies.

In May, the Finance Ministry reported that the scheme collected a total of 2,891 kg, mostly from temple trusts, since its launch.