Beyond Money
Dedicated to the Uplift of the Differently-abled
In his final year at the government college of technology, S Ramakrishnan decided to appear for the Indian Navy selection exercise, with the intention of joining the defence services. But fate had decreed otherwise. He fell from a height during the selections and suffered multiple spine injuries that left him a quadriplegic for life. However, the accident opened an important chapter in his life. 
 
He went through intense self-rehabilitation and decided to do something meaningful with his life by helping the underprivileged. So, in 1981, the International Year of the Differently-abled, he set up Amar Seva Sangam, with himself as its founder and first employee. He named the organisation  after Air Marshal Dr Amarjith Singh Chahal of the Naval Hospital at Pune who motivated and inspired him to use his brain and energy to lead a positive life. Located at Ayikudy village in Tamil Nadu, it began by teaching basic English, Hindi and offered personality development programmes for schoolchildren. Its work soon gained recognition locally.
 
A decade later, there was another turning point. By 1991, Mr Ramakrishnan had the vision of building a full-fledged rehabilitation centre providing all facilities to the differently-abled under one roof. At that time, he came in contact with S Sankara Raman a young, gold-medallist chartered accountant who suffered from muscular dystrophy and was confined to a wheel-chair but had a lucrative practice.  The two men discussed Amar Seva Sangam and Mr Sankar Raman was so convinced about Mr Ramakrishnan’s cause that he decided to devote all his energies to the organisation and even shifted his base from Chennai to Ayikudy, in 1992. From then on, the institution started growing briskly and has expanded its activities to provide education, training, institution-based rehabilitation, village-based rehabilitation and employment generation for the differently-abled. 
 
This includes a home for around 50 children with loco-motor disability and associated problems. It runs a school for children with a wide range of special needs. There are hostels for the physically challenged providing food and shelter while undergoing education and training programmes for income-generation. The Sangam has early intervention centres, a special school for the mentally challenged, centre for rehabilitation of the spinal-cord injured, a physiotherapy centre, vocational training centres, tailoring and notebook making facilities, etc. Everything is offered free of cost to the differently-abled.
 
While Sankar Raman is satisfied with the achievements of Amar Seva Sangam, he, too, like other NGOs admits that fund-raising is a big challenge. “We try to meet this through various public relations exercises and participation in events like Standard Chartered Mumbai Marathon, besides use of social media like Facebook, Whatsapp and simple emails too.” Clearly, as the funds come in, Ayikudy will continue to be a temple and refuge for the differently-abled. The institution generates some revenue from the sale proceeds of products like notebooks and garments produced by its wards.
 
Who does the actual work to move the disabled on to a forward track? Sankar Raman tells us, “Amar Seva Sangam’s annual budget at present is Rs8 crore. We have nearly 300 staff members and more than half of them are working in the field to render services at the doorstep of the differently-abled. We have physiotherapists, special educators, therapy assistants, special educator assistants, including speech therapist and special educators for hearing and visual impairments.”
 
Amar Seva Sangam’s work and dedication has touched the lives of over 14,000 people with disabilities in 800 villages in the districts of Tirunelveli, Tuticorin and Virudunagar through 460 self help groups. 
 
Amar Seva Sangam is a non-profit organisation. Donors are eligible for income-tax benefits under Sections 35AC and 80-G of the Income-Tax Act. The Sangam also is registered with the home ministry under the Foreign Currency Regulation Act to receive foreign contributions.
 

 

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The Real Cost of Gold Loans
Indians love gold and even the poorest Indian tries to acquire the smallest trinket that doubles up as jewellery and long-term savings. Naturally, television advertisements featuring movie superstars who tell you how easy it is to borrow money against that carefully accumulated gold, touch an emotional cord. 
 
Watching an Akshay Kumar slipping gold across the counter and getting a wad of cash back in a minute to finance a child’s education or to buy a tractor is so appealing that people across the economic spectrum look at gold loans as their first borrowing option, when they are in a tight spot. In almost every case, the gold that is pledged is not even a family heirloom of great emotional value and borrowers are clueless about the high interest they are forking out against an asset which fetches no return—one where although price appreciation has worked for Indians, over the decades, it is not guaranteed. 
 
This emotional reaction and poor numeracy also makes lending against gold a very lucrative business. Allow us to explain why borrowing against gold is a mistake for most people, except those who own heirlooms of antique value far beyond the intrinsic value of gold in the jewellery. 
 
Some Basics about Gold Loans 
 
Borrowing against gold is attractive because few questions are asked. The lender does not ask you to disclose your income, produce a salary-slip or worry about your credit score or credit report. But think about it; why should the lender worry? It has your valuable gold in its possession and the actual loan disbursed is just 75% or less than the market value of gold. The lender is in trouble only if the gold price crashes by 30%+. But past data shows that a sudden crash in gold is a remote possibility, if not impossible, and when the price falls, lenders immediately begin to pressure the borrower to either pay back a part of the loan or bring more gold/jewellery as collateral. 
 
In most cases, only the interest is charged on a monthly basis, and the principal can be repaid at the end of the tenure to release the gold. The borrower can opt to repay both the interest and principal at the end of the tenure as well. However, the latter will prove to be costlier as the interest gets compounded. If a person defaults on interest payments, the penalty can be huge. Like every other loan, lenders may charge a processing fee, valuation charge, late payment penalty and pre-payment penalty, all of which add to the costs. Each lender has a different set of charges. Unlike equated monthly instalments (EMI), both repayment options involve pressure on the borrower to come up with a big chunk of money for repayment, to have the gold released. If you can, indeed, come up with such a sum, wouldn’t it be better to sell the gold and buy when you have the money? We will come to the arithmetic of this later. 
 
Faster Process but Not Transparent
 
Most non-banking finance companies (NBFCs) claim that they offer a loan of 70%-75% of the market value of gold item. However, when we asked for the exact amount, we were told that only once they see the jewellery, they would be able to give the exact loan to value that can be availed. Even a RBI working group found that the borrower is generally not clear about the gold price used for valuing the ornaments.
 
The RBI working group found that the format and content of documentation followed by each NBFC appear to be different, although each one of them claims to be giving a pawn ticket and loan agreement copy to the borrower. But when they spoke to complaining borrowers, they found that the pawn tickets do not contain the specific details of the jewels pawned, their weight in grams and the assessed value of the jewels. It does not contain complete details of the annualised rate of interest, maturity period of loan, details of auction procedure in case of default, any other charges, or the maturity period of the loan, etc. 
 
The procedure relating to auctioning of jewels is not transparently explained to the borrower. Even though the borrower is informed by the NBFCs about the auctioning of their jewels, the borrower is not informed where and when the jewels are auctioned.
 
In one complaint received by RBI, the borrower was neither informed about the auctioning of his jewels nor called for repaying his loan. Above all, though the market value of ornaments in this case was much above the total dues outstanding, the difference on the sale of ornaments was not given to the borrower. But let’s us now come to the simple math of why borrowing against your gold makes little sense. 
 
The Actual Cost of Gold Loans
 
When you borrow against gold jewellery, you are paying a very high interest as well as documentation, processing and valuation charges on an asset that you already own. Further, since people only borrow against gold in an extreme emergency, the chances of paying back within a year are low, which means that the interest mounts and the risk of default is also higher. Let’s look at a few possible scenarios to check if taking a gold loan is worthwhile.
 
We have based our study on the cost of a gold loan from Mannapuram Finance. We were told that the interest rate will be 2% per month(pm) and the loan-to-value (LTV) will be around 70%. There are tenures of maximum three months; hence, at the end of each quarterly period, if only the interest is paid, the loan can be extended for another three months. This can go on until the entire principal is paid back. However, as the contract is renewed every three months, the borrower may need to pledge additional gold, if the price of gold falls and does not meet the LTV criteria.
 
 
 
Using the above information, let’s say Ramesh pledges 50gm of gold to avail a loan of Rs1 lakh at an interest of 2% per month. The market value of the gold is Rs1.44 lakh at the rate of Rs2,880/gm.
 
Now let’s analyse what Ramesh will actually pay under different repayment options and when gold prices are rising or falling. We will then compare this to whether selling the gold and buying it back in small lots every month would have been a better option for Ramesh.
 
Scenario 1: Gold Rates Remain Steady
The interest on a gold loan of Rs1 lakh works out to Rs2,000 per month. We assume Ramesh is capable of repaying Rs3,000 every month which includes interest and principal. At this rate, it will take him almost 56 months, or five years, to pay up the money and get his gold back. If Ramesh chooses to reduce the monthly payment by Rs500 to Rs2,500, it would take him nearly seven years to pay back the loan.
 
 
On the other hand, if he had chosen to sell the gold, instead of borrowing against it, he would have needed to sell only 35gm of gold to raise Rs1 lakh. Now, if he starts buying back gold worth Rs3,000 (equal to his repayment of principal plus interest in the above-mentioned scenario), he would have recovered his 35gm of gold in just 33 months or under three years. 
 
Even if he bought back gold worth just Rs2,500 every month, he would have his gold back in 39 months. And he would not have paid heavy interest and processing charges to a gold loan company. But one may argue that gold prices may not remain the same and they could rise sharply, making a loan option more attractive. Or, as has happened recently, gold prices could fall too. Let us look at what would happen to Ramesh’s borrowing under these two scenarios.
 
Scenario 2: Gold Rate Rises
Suppose Ramesh sold 35gm of gold (as mentioned above), but gold prices began to rise by say, 6%-10% every year. Even in this situation, if he buys gold worth Rs2,500-Rs3,000 every month, he would still be able to buyback the entire amount of gold in four years. If the gold price rises more sharply, at 12%pa, it will take Ramesh about 50 months (a little over four years) to buy back the gold. In effect, even when gold prices rise, it makes better sense to sell the gold you have and buy it back, rather than borrow against it. 
 
 
Scenario 3: Gold Rates Fall
If Ramesh has pledged gold to raise Rs1 lakh and gold prices fall, then he could be in serious trouble. On the other hand, if he sold gold to raise emergency funds and is buying it back, he is a real winner. Consider what happens if Ramesh had borrowed against his gold. If the price of gold declines significantly, he will need to pledge additional gold to maintain the loan to value ratio or repay a chunk of the money. Our analysis shows that Ramesh will need to pledge additional gold only if gold prices decline by 15%-20% on an annual basis. Also, if the LTV increases, the financier can charge a higher interest.
 
In the above scenario, a 12% decline in gold prices may not impact the value of gold pledged, if the amount repaid is Rs3,000 every month and includes a portion of the principal. However, Ramesh is capable of repaying only Rs2,500pm, with a very little part of the principal being repaid, he will need to increase the gold pledged amount by one gram at the end of the first year itself. By the end of the tenure, he would need to pledge an additional 3.25gm of gold, or pay a higher interest, in which case, his repayment period increases.
 
 
There is a also a good chance that he will not be able to keep up with this high interest cycle and end up losing the gold altogether or end up in a payment-trap, if he wants the same gold back. 
 
On the other hand, if he had sold the gold and raised money and bought back even Rs2,500 worth of gold every month (using the money saved on interest), he would be able to buy more gold every month, as prices fall and get his gold back in less than three years. 
 
The Reality
 
Clearly, liquidating gold to generate cash and buying it back at regular intervals is a much better option. It is foolish to pay a fat interest on an asset that you already own and take the risk of a penalty or losing the gold if you are unable to repay it in time. What is important is to avoid the emotional trap involved in wanting to retain the very same gold ornaments. Apart from a few gold ornaments, like a wedding or engagement ring, a mangalsutra, or a traditional piece of jewellery that has been handed down a few generations, there should be really no emotional attachment to an inert metal object. Also, most sensible women actually like to save carefully and make newer and better ornaments by melting down old ones. And many women also own jewellery that is gifted or handed down to them that they would be happy to sell and buy something new, contemporary and modern. It is far smarter to trade soppy sentimentality for good financial sense. So, the next time you hear of someone caught in a financial jam, tell them to switch off the gold loan advertisements and do some hard number-crunching.
 
 
 

Your Real Interest Cost and Terms

 

We contacted two of the biggest lenders to find out what a borrower would actually pay on a gold loan. We were told that the interest rate depends on: who is the customer, type of ornament, size and tenure of loan. This translates to a simple interest of anywhere between 12%-24% per annum. However, an RBI report of a working group published in February 2013 found that the interest charged was ‘not transparent’ and it was not clear whether the “maximum interest rate is limited to 24% or it sometimes could go up to 30% or more.”

 

The RBI also found that a major proportion of the gold loan portfolio of NBFCs covers an average interest rate of 24%-26% and only 2% of their portfolio comprises loan at an interest rate of 12%. It is always said that the poor in India pay much more and the RBI report confirms this. It found that those in the unorganised sector pay 30%pa (per annum) and higher penalties and there was less transparency in the transactions. Even otherwise, the RBI report found that a majority of the gold loans are for borrowing of Rs30,000 to Rs50,000 and the quantity of gold pledged on an average is 40 grams.

 

This really means that gold loan companies are thriving because Indians in the lower income groups are rushing to borrow against gold without understanding how much they are paying out, or exploring more sensible options. In most cases, you will find that they are carried away by advertisements featuring mega film stars and none of the advertisements breathes a word about risk factors such as high penalty clauses or transparency in interest charges. The RBI, as the regulator of gold loan companies, ought to have insisted on this, like the capital market regulator does with mutual funds.

 

As we said earlier, a gold loan requires the borrower to estimate her ability to pay interest, fees and charges and then a lump-sum to release the gold. But when borrowers are unable to work out the ridiculously high cost of borrowing against a valuable asset that they already own, what is the chance that they will accurately estimate their ability to repay the loan? If a borrower is unable to repay the loan, the lender gets possession of it.

 
 

 

 
 

How Popular Are Gold Loans?

 

India is a gold-loving nation and accounts for about 10% of the total world gold stock. Of this, rural India accounts for nearly 65% of gold owned, probably because it is seen as the safest asset. Most people have an emotional attachment to gold and will not sell it except in times of extreme financial distress. This is what makes gold loans such an attractive business for lenders. While the unorganised sector accounts for 75% of gold loans, the remaining 25% of the market, with organised sector institutions and banks, is also growing rapidly. According to the World Gold Council, out of the national gold stock of around 22,000 tonnes, about 600 tonnes is monetised through loans because they are easy to obtain and processed within hours, if not minutes, as claimed by the advertisements. It is clearly time to be less emotional and more sensible about gold.

 
 

 

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COMMENTS

v sai santhosh Chada

5 months ago

"that the interest rate will be 2% per month(pm)"
most banks offer gold loan at <12% per annum. All the above calculations you used above are for exact double rate.
And selling the ornament, buying it back later involves making charges for the jewelry.
And ornaments have small % of other metals mixed. This should be taken into account as well.

Theoretically I agree with you on the approach, but I feel if one is disciplined enough to buy back gold every month with exact amount equal to EMI, I don't think one would be in a situation to lend money on gold.

Mahesh S Bhatt

5 months ago

Challenge is profuse & profound where we are living in dangerous shady grey worlds where one fine mornings Top 4 or 5 financial cos meltdown & there is hole of % 21trillion in economy (2008) Lehman Bros crash & American Insurance Companies executives get bonus & spas & Obama shouts without any meaning.

Guys who degrade American ratings to A + ( Indian) loses job/Raghuman loses IMF job & now Governor job for telling truth.

Nouriel Roubini is branded as Dr Doom by media Economist who predicted the crash 2008.

China buys gold after Brexit.

So Currencies/Stocks/MF's/Insurance/Bonds/Land( Dadar from 13000 psft 2003-35000 2009)/Oil( $ 110 to $30)/

even Onion now tomato prices shoot 100/kg in Dadar wholesale market.

Rains come 3 days they crash to Rs 60.

Now today's Times says Onions may rise.Sharad Pawar & APMC's make Nashik farmers come here in tempos & are happy to sell Onions of 5kg at Rs 10.

So where does common man find safe haven.Gold.

Money & Markets are dangerously manipulated

Japan is now asking 0.25% interest for depositing money Euros are being printed/ US has already printed $$ QE 3 now not raising Interest rates.

So world is staring simply at great crash.

Common man shall be stripped naked.Poor is anyway's naked.Rich Mallya's it doesnot matter few thousand crores here n there

Simple we complicate confuse & make chaotic of life which is simple & sweet.

Enjoy Rain Indradevo bhava.Ramadan karim Amen Mahesh

c v manian

5 months ago

People , who take gold loans, are generally in dire need for the money and do not have time or patience to calculate compounded interest that is being charged or how much they will have to pay in the end. It is a question of need and ready availability of liquid cash for the emergency. That said, the analysis clearly shows that it is better to sell and buy back the gold later on.

With the advent of catatometer, people have started realizing the extent of cheating practiced by pawn shops and traditional jewelry merchants. Hence it is better for evaluating the gold content before thinking of gold loans. That will give them a clear idea of what they stand to lose with gold loans.
Finally it is left to the borrower to evaluate what she/he is getting for their ornaments and judge their actions accordingly.

hmnagdev

5 months ago

Obviously, the gullible borrowers are deceived by the lenders with such easy loan availability . I thank you for your guidance and reasoned analysis. Our sincere thanks to you.
RBI must come out with clearer guidelines for Gold loan for Banks plus NBFCs. In today's India, people must not be deceived. Regards. H.M.Nagdev.

REPLY

Arun Ohri

In Reply to hmnagdev 5 months ago

RBI has already come out with clear guidelines on gold loans.

Shirish Sadanand Shanbhag

In Reply to hmnagdev 5 months ago

I fully agree with your view sir.

Amit Agrawal

5 months ago

Nice analysis. The financial literacy is very bad among is poor..

Shirish Sadanand Shanbhag

5 months ago

I fully agree with your analysis of gold loan. It is always better to sell the gold (or gold ornaments) and meet your financial need, than take loan on your gold.
In your analysis, you have not made loss in tax and making charges. You have assumed only gold coins or gold metal. If we include these cost, then gold loan will be a costly affair.

Sucheta Dalal

5 months ago

Arun Ohri ... for some reason you are spreading wrong information. Every jeweller sells 1 gram of gold in a coil or coin. Nobody is going to make jewellery with every gram and break it to add another gram or two. So making cost does not arise. Also when the gold is valued for a loan, there is a haircut to deduct valuation and making . Please do not use this forum to mislead.

REPLY

Arun Ohri

In Reply to Sucheta Dalal 5 months ago

Show me one shop which is willing to sell one gram coin or coil at less than cost of gold for one gram plus Rs. 400 making charges. You may refer to bank website selling gold one gram coin. Gold is valued at carat price as applicable in local market as per RBI guidelines. No one can offer loan value higher than RBI value.

Arun Ohri

5 months ago

Making cost of jewellery is around 15% plus you have to pay sales tax of 1% on entire value. I think recommendation of selling gold and buying every month will fall flat if you add these costs. Secondly, you can't buy similar jewellery in small parts. How can you buy 1 gram bangle a month if you have sold 12 gram of gold (normal weight of bangle). Thirdly, one has choice of borrowing from bank against gold. I hope, author is not suggesting that bank agreements are not transparent. One would agree that bank rate of interest on gold is lower in comparison to private players. Fourthly , it is cheaper than borrowing on credit card.
Gold loans have place in market. However, customers of same needs to be aware of real cost. I don't grudge high rate given the fact the service is next door and loan provider needs to recover their cost too. Most of them have borrowed from banks or raised money from NCDs, so cost is expected to be high

REPLY

Anand Vaidya

In Reply to Arun Ohri 5 months ago

Arunji, agree with your points. My relative exchanged old gold for new gold jewellery and the total loss was like 24% !!!

only if one can buy and keep gold coins, then they can get almost full value while selling (minus charges, taxes, rate volatility etc). It is simply better to start an RD for a rainy day!. But then people going for gold loans are financially illiterate.

Sucheta Dalal

In Reply to Anand Vaidya 5 months ago

Apart from which their gold is independently valued and they get less value too. They lose in multiple ways.

Shirish Sadanand Shanbhag

In Reply to Anand Vaidya 5 months ago

I fully agree with Anand Vaidya.

Sanjay S

In Reply to Arun Ohri 5 months ago

I disagree with Arun..

1. Even with the costs added, it will be cheaper to buyback gold if the time period is over a year

2. Most jewellers offer gold savings schemes which allows one to buy some amount of gold monthly and at the end of 12months or so, they either give a discount on the making charges etc. Or a bonus of one instalment. One can even buy gold etfs or gold saving mutual funds on a monthly basis. So this even takes care of the cost in 1.

3. Probably.. But the interest is still a cost.

4. Yes for short terms.. In most cases it will make better sense to sell gold with no burden of interest costs.

Arun Ohri

In Reply to Sanjay S 5 months ago

Even if you bought gold via ETF (assuming zero brokerage), you still have to pay making charges once you want similar jewellery. I don't see in the analysis any working for that. Most of the gold loans are for short period. please see annual report of gold finance company which provide period wise breakup. You may also find that 80% plus customers take their jewellery back (some credit to emotional attachment). Gold saving schemes are unsecured and unregulated. Either they offer accumulation of gold or interest which can not exceed 12% as per RBI guidelines. You are also get bound to buy from that shop (some economic cost?)

Balasubramaniam K

In Reply to Arun Ohri 5 months ago

Very good analytics!

Shankar ganesh

In Reply to Arun Ohri 5 months ago

perfect

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