Gold monetisation scheme to help cut loan rates

The gold monetisation scheme and gold bond schemes are expected to trigger fresh competition in the business, say experts

As the gold monetisation scheme is all set to start from Thursday, non-banking financial companies active in gold loan business are looking to cash in.

Rolling out new schemes, these companies seek to attract more customers, as interest rates applied on loans against gold are expected to come down.

“Definitely interest rates will come down,” said Thomas George Muthoot, director of Muthoot Fincorp, a leading gold loan company.

Gold bond schemes will trigger fresh monetisation and competition in the business, as even physical infrastructure to handle and store gold is not a must for doing business.

Gold loans can be released online or by bank transfers on the basis of demat accounts of gold deposits or bonds which will be used as collateral.

So, “new players will enter the business. Obviously, this will cut down the interest rates," he said.

At present, interest rates on various gold loans range from 12 to 18 per cent.

New attractive packages offering loans at lower rates will also be there once the scheme becomes successful.

Most leading players are planning new schemes such as special over draft facilities on gold bonds.

One can take loans against gold bonds, just like one can take loans against shares.

Besides, the credit amount could be higher than one could get against shares.

"This will enthuse business and it is likely that there will be manifold increase in business," said a top-level officer of another NBFC.

At present, the average annual business is Rs 50,000 crore (Rs 500 billion) in the organised gold loan business segment with an average combined annual growth rate of 43 per cent.

"We are in the process of devising new schemes to attract more customers to our branches. It is inevitable," the officer quoted above said.

K P Padmakumar, former managing director of Federal Bank, said gold loan companies should have to roll out new schemes to benefit from the new business situation.

According to him, it is unlikely to have much impact on the gold loan business. Sentimental attachment to gold ornaments is also a major hurdle, especially in south Indian states, he added.

Experts said the scope of the loan business is based on the success of the new scheme.

According to responses from clients of leading NBFCs, the scheme will succeed in case of gold kept in bank lockers as that will be deposited under monetisation.

Companies might also motivate borrowers to monetise ornaments and put deposits as collateral against which loan at attractive rates can be given and customers will earn an interest from the bank which will further cut net borrowing cost.

Keyur Shah, chief executive officer, Precious Metals Business, Muthoot Pappachan Group, said lenders need not worry about valuation, carotage, etc. while disbursing loan.

Customers will also benefit, as there is no risk of carrying gold, he said.

Image: A salesman displays gold plates in the form of the Indian rupee note at a jewellery showroom. Photograph: Pawan Kumar/Reuters