The need for cash is perhaps one of the most common problems which people all over the world confront. The same is true about our place (J&K). Since my childhood, I have seen people looking for cash when gripped in emergency situations. Most of the people in a cash crunch situation used to pawn personal items of value for cash loan. The personal item pledged against cash loan used to be gold jewelry. And most of these transactions used to be (and continue to be in practice) informal though pawnbrokers.
We still have a good network of pawnbrokers here continuing to provide monetary loans in exchange of gold ornaments. The ornaments are held by the pawnbroker for a contractual period of time during which the owner of the jewelry can repay the cash loan. If the borrower fails to repay the loan, the broker has the right to sell the pledged gold items to get back his money.
Historically speaking, pawn-broking is said to have first emerged more than 3000 years ago in ancient China as a method of granting short-term credit to peasants. Households holding their assets primarily in gold and jewelry which they in times of unrest and financial need pawned to get cash loan.
But over a period of time the situation has changed. Loan against gold facility found its place in the formal financial system and we have a series of financial institutions and banks offering the facility in the country.
Today loan against gold facility has emerged as one of the best means of raising quick, short-term funds. It's a win-win situation for both customers and the banks. Shorter repayment period, lower processing time and cost, and greater returns due to higher interest rates are some of the features which gives advantage to the banks when compared with home and car loans. The borrowers get timely cash assistance to meet their emergencies.
Meanwhile, a KPMG report reveals that the formal gold loan industry is on a growth trajectory. The report predicts that value of organised gold loan market in India will grow to Rs 3,10,100 crore by 2020. Currently, it's valued over Rs 2,70,000 crore.
In succinct this 'Gold Loan' facility through formal channels of finance has been serving the hope of people to fund their Child's education, start a new business venture, expand existing projects etc. without hassles. In fact, it's an answer to tight spot on financial front. Besides, borrowing against gold is attractive as few questions are asked. The borrowers are not asked to disclose income, produce a salary-slip or worry about credit score or credit report.
If we look at the 'gold loan' scenario here in our state, it is not flourishing compared to the rest of the country. Here mostly, pawnbrokers in an informal way have been bridging the gap by lending against pledge of gold.
Precisely, it's not a popular facility here, except we come across an advertisement (ad) on television channels in which Amitab Bachhan is promoting 'Gold Loan' facility of the Muthoot Finance Ltd., the flagship company of The Muthoot Group. The ad has a perfect tagline: Soch Badaliye Aur Life Mein Aagey Badhiye (Change your thinking and move ahead in life) and talks about convenience of gold loan compared to home loan or any other personal loan.
But the scenario is expected to change now as J&K Bank opened a window to give loans against gold ornaments, initially at some of its designated branches. Though some banks operating here have been offering such facility, but the public response has remained subdued and guarded. J&K Bank being a popular local player would be preferred over non local players to pledge their valuables to get cash loan against gold.
The accountholder of the bank owning gold jewelry is eligible to get instant cash loan facility up to Rs.15 lacs. However, the loan limit would be maximum 70% of the value of Gold and Jewelry (Loan to Value). Bullion item like bars and biscuits won't be considered under the facility. Even pawnbrokers, goldsmiths, gold valuers, firms, companies, trusts, societies and other associations have been kept out of the ambit of the scheme.
So, the opportunity is there to let your yellow metal to talk, but be confident of returning the money in time. Otherwise, default in repayment will result in penalties and chances are you may lose ownership of your commodity.
(The views are of the author and not that of the institution he works for)