Gold Loans, as we have critically analyzed on multiple occasions in our discussions regarding its effectiveness and its role in the economic system of the country has emerged as a prime element of integrating the concept of economic growth and development and introducing measures to incorporate financial growth in the country.
Although we have defined Gold Loans on multiple occasions in the past, it is equally important to highlight a few points in the definition, factors that work in favour of gold loans becoming the most effective instrument against monetary inflation in the economy. Firstly, a gold loan is secured which means that by depositing collateral security you can secure the gold loan amount as the banking institution would also be satisfied with the guarantee that the borrowers would provide the requisite amount of loan taken along with interest to the banking institution.
The second factor that works in favour of gold loans becoming an important financial instrument is the impact it has on the lending mechanism of the country since it is considered to be an extremely positive factor to influence investment growth as it encourages borrowers to inject more money into the economic framework of the country. However, even if the aforementioned advantages or benefits are highlighted, some confusion does arise when we talk about the negative impacts associated with the functioning of gold loans in the economic scenario of India. Following are some of the biggest inhibitors to the gold loan market in India-
Improper Usage of Loan To Value Ratio- One of the biggest malpractice that is evident in the gold loan sector is the improper usage and exploitation of the existing system of Loan To Value Ratio. You might be wondering what exactly the function and the conception behind this term is. Well, Loan To Value Ratio is the concept whereby we get to know that only a fixed percentage of the collateral securities deposited by the borrowers to the private commercial banking institutions are payable to the borrowers as the quantum of gold loans and the borrowers can only utilize a percentage of this amount as the loan facility.
For example- Suppose you have deposited gold jewellery worth 20 lac to the requisite banking institution. According to the policies of the banking institution, only 80% of the gold loan deposited would be payable to you as the amount of the gold loan. This 80% is known as the Loan To Value Ratio. Thus Loan To Value Ratio has emerged as one of the most potent features of Gold Loan EMI calculator facilities and thereby has assumed the role of becoming one of the most important ancillaries of Gold Loans.
Problems in Gold Reacquisition upon non-payment of Interest amount
The second criterion that is a big impediment in the growth of the gold loan market in the economy includes the problems and difficulties associated with re-capturing the gold deposited by the borrower which was deposited while taking the loan amount and the subsequent issues associated with the degradation in the CIBIL Score of the borrower upon delay in payment of interest and non-payment. According to the policies of the IDFC gold loan, if the borrower is unable to pay off the required amount of interest within the specific time-frame, the banks have the authorities to seize the gold deposited, and thereby they would be unable to procure the gold any more and it would be lost.
Conclusion
Thus these negative effects must be eradicated to yield the best results for the functioning of gold loans. Eradication of these negative issues can prosper the economy and assist in bringing about economic growth and development in the functioning of the economy. However, there are times when we also come across issues that rise through as the biggest negatives and factors acting as a restraint in the functioning and implementation of financial variables in the economy.
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