InvestorQ : On what basis do gold loan companies give you funding against gold?
Ria Jain made post

On what basis do gold loan companies give you funding against gold?

Anu Biswas answered.
3 years ago

This is perhaps the most important aspect of the gold loan business. If you approach a gold loan company with your jewellery, they will finance you to the extent of 60-70% of the value of the gold (RBI restricts LTV at 75%). Even this gold value is adjusted lower so the actual margin is much higher. What do the gold finance companies do with this gold? This gold is then pledged by these gold finance companies with large banks where the funding is to the tune of over 80% of the value of the gold. There is a margin that the gold finance company retains. Secondly, there is a huge divergence in the rates. The PSU banks normally refinance the gold loan companies at 11-13% as it is fully secured. However, the gold loan companies, in turn, charge anywhere from 18% to 22% annualized based on the credit risk perception of the borrower. It is this huge margin that keeps the gold loan companies going. Since Indians hold a lot of gold, there is perpetual demand for the gold funding business. People also feel safe as it is used to finance your needs temporarily and then the gold can be retrieved back once the need is over and the loan is repaid.