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Gold Loans and Frauds

Gold loans come under secured loans where gold jewelry is used as collateral. The loan amount is usually a percentage of the gold’s value. You can repay the loan through monthly installments. After the repayment, you can take your gold jewelry back. Private Banks, nationalize banks and other financial institutions offer gold loans at affordable interest rates. Generally, borrowers use this loan to meet a sudden financial goal, like marriage or a child’s education etc. Many people prefer to go for a loan Instead of selling the gold.

The bank/lender uses the gold as security against the amount default by the customer. The loan amount sanctioned is a few percentage of the value of the gold that has been pledged.

A gold loan is count as the short-term loans and the repayment period can range from 1 month to a few years. If you are in need of money for immediate expenses & expect to be able to pay it back in the short term, then this kind of loan might be a better option.

Frauds in gold loans can be due to several reasons as mentioned below:-

  1. Pledging of fake gold
  2. Pledging stolen gold without clear title
  3. Pledging Low quality Gold  which is less than 18 K Gold

According to a study made by one of the Major gold loan NBFC of India, the quantum of fraud earlier which was used to be 1 in 30,000 customers has come to 1 in 10,000 customers which states that there is a sharp increase in frauds with respect to gold loans.

There are three parties in every gold loan transaction:

  1. The Banker
  2. The Customer
  3. The Registered valuer appointed By the Bank

Now there can be a scenario where all the 3 concerned people are in perfect understanding and cheat the Bank if there are no proper /cross checks & controls or in the situation where absence of Internal Audit & Internal Checks takes place.

How Frauds Take Place In Gold Loans?

1 Case: – First case occurs where fake gold is certified by the registered valuer as genuine and is kept in the bank and only after some time the banks realize that the gold served as security is fake & start the legal proceedings to recover their amount which was disbursed earlier.

2 Case: – Sometimes the entire proceeds of the gold loans are swindled by the bank’s officials itself and this comes into light when there is a routine transfer of officials and the problem start during handing over of the charge, there would be a big charge under gold loan disbursement but the fact would be that there is no physical gold in security and the bank has no other option but to hand over the case to the police of that jurisdiction by lodging a written complaint & filing of FIR.

3 Case: – The registered valuer gains the trust of the bank officials and routinely passes the valuation of fake gold as genuine gold and he/she himself/herself will arrange customers for a gold loan without coming in to picture directly for a small commission to his/her partners in crime in exchange of Pan Card / AADHAR Card details to create the fake customer ID. In such cases the loan disbursal will be a huge amount and prima facie the valuer will be the bigger partner, this is a common act where a silver item is plated with gold from 2-3 layers of gold and passes as gold for the sanctioning of a loan.

These are the Reasons which shows that gold loans are better option for new borrowers/ self-employed and those with irregular income?

  1. Helps built credit score
  2. Works like credit card
  3. Ease access
  4. Increase in gold rates will work in your favour
  5. Formal sector lending
  6. Overdraft for the self-employed
  7. Priority sectors get cheaper loans

Why Gold Loans Are Favorable In India?

When you go for gold loan to the bank then you do not need any CIBIL Score and the Loan-To-Value Ratio(LTV) stands at an high 90%, but this becomes an advantage when the price of gold are going up consistently in the present economic scenario because of COVID-19 pandemic and gold is described as an instrument of Safe Haven, which is so right since the margin ratio also comes down sharply and the banks have to call for less margin from the customer which he may fail to give because of poor Economic conditions &poor  Liquidity Issues.

Reserve Bank of India has enhanced the permissible Loan-To-Value Ratio on gold loans for non-agricultural purposes to 90% as against 75% earlier, and this relaxation will be available till March 31, 2021.

Farmers up to an extent can take Gold loans under lesser rate than commercial loan under the priority sector lending as notified by RBI with some instances of interest subvention for prompt customers up to 3 %. So good farmers can take benefit from this scheme even if it is gold loans.