| Gold, the alternative security
Gold is yet another asset the banks gladly accept as mortgage. Just like the NSCs and KVPs provide banks with an intangible commodity in hand, and hence, an advantage lies with the banks.
The increase in the price of gold has come as great news for the banks, and they are utilizing it in every way possible. Today the prices of gold stand around Rs 12,300 per 10 grams and are ruling firm at this level. This high price definitely makes the yellow metal an attractive mortgage item to the banks.
Also, compared with a personal loan, a loan against gold could cost a customer a 2.5-3% lesser interest rate. Higher prices of gold mean the market value of the gold or gold jewellery you bring to the bank would also be higher than what it would have been when the commodity was at say Rs 8,500 per 10 grams. In other words, this means that the loan you are entitled to receive from the bank would also be higher.
However, the banks use their own mechanism to give a loan. They do not give the complete market value of gold on a certain day as loan. The methodology the bank uses is to keep a safe cushion or margin, usually 20%, to take care of possible price fluctuations and is willing to tender the rest as a loan. For example, if the value of gold offered as security by you is Rs 10,000, the bank could keep a margin of Rs 2,000 and offer you a loan of Rs 8,000.
To ensure credibility to the customers, the valuation of gold is done in front of them at the bank branch. Then this gold is sealed and stored by the bank and the loan disbursed.
Another advantage of using gold as mortgage is that the processing fee is lower in case of a loan against gold, compared with a personal loan. ICICI Bank, for instance, charges a processing fee of 0.50% of the total loan amount for loan against gold, while the same for personal loans is 2%.