The Indian Financial Infrastructure is completely dependent on financial leverage. This is provided by the nationalized government and private banking sector in the form of money loans to the public. Moreover, the facility is eligible for the people to combine venture and seed capital for entrepreneurship and run a business. Presently, the banks are also availing people in times of financial distress when their income has significantly that reduces and move forward through a phase of virtual unemployment. The bank helps people by providing cash loan even in the crisis.
Gold Loan is undoubtedly one of the most popular forms of loan available in the Indian Financial System. In Gold Loan, a person can avail of a loan by pledging their gold jewelry and ornaments to the Axis bank gold loan. Gold Loans are very secure thereby helping the consumer with an immediate cash need to either tide over a financial crisis they are undergoing or a huge amount. However Gold loans are not an unmixed blessing and have a distinct set of disadvantages that somehow deter the position of the gold loans and have thus somehow lost its sheen in performing exceedingly well over the years.
Following is a list of the disadvantages offered by gold loans-
Higher Rate of Margin- One of the biggest disadvantages associated with gold loans is that the margin of equivalency of the gold and the monetary amount that is provided by the banking authorities regarding the demand of the borrower and thus offers a higher and more extensive rate of margin. In most of the cases, the private commercial banking organizations in the country offer a Loan to Value ratio of 75%.
The LTV ratio refers to the margin of money that is offered by the banking authorities to the borrowers equivalent to the amount of gold that is deposited to the banking authorities by the borrowers as collateral security deposits. Since the banks do not offer a higher LTV ratio thus complication arises when the borrower keeps a particular quantum of gold as security deposit and does not get the satisfactory monetary amount as loan.
For example- when you deposit gold valued at 20 lac to the banking authorities and keep it as a collateral security deposit, the banks keep a reserve of 25% and 75% of the gold would be provided as a monetary loan amount to the borrower. Since the borrowers would not be encouraged since a significant portion of their loan amount will be kept as a reserve and they could not be inclined to take the loan as they would be unable to leverage the loan amount.
Loss of Gold- One of the biggest disadvantages deterring the growth of the gold loan market in the financial infrastructure of a country is the loss of gold jewelry and ornaments that can take place if there is a default in payment of interest and installment that is payable monthly. If the borrower is unable to secure the amount of gold deposited by paying the requisite interest charges he will be unable to prevent the bank from seizing the personal assets deposited and would not be able to access them until and unless the gold loan amount in full is repaid by him to the banking authorities from whom he had taken the gold loan.
Conclusion
Despite such wide coverage, the aforementioned disadvantages deter the growth of the gold loan market and large scale improvisation is required to render growth and diversification in the gold loan lending process. If you have any query regarding the gold loan, drop your concern in the comment section and our executives will get back to you with a logical solution.
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