New Gold Loan Might be a Game Changer

A new loan in the market is turning heads and could set a new trend in loans against gold in the market. Kerala Fashion Jewellery (KFJ) has introduced an innovative scheme called the GL Plus loan. The way this loan works could help solve a few problems that the jewellers have been facing. At the same time, customers stand to benefit from this scheme.

What happened earlier

A couple of years back, the Central Government levied restrictions on gold imports. This led to a shortage of gold supply in India. Jewellers resorted to providing incentives to their customers to trade in their gold for cash. They even offered rates higher than the prevailing rate for customers to bring in their old gold. Incentives of Rs.50 to Rs.100 on each gram were offered.

What’s happening now

Earier in 2016, the Government had proposed to levy excise duty on non-silver jewellery. This led to a nationwide strike by the jewellers. The strike was eventually called off and the Government was forced to reconsider its plans. Currently, many of the restrictions have been lifted in comparison to three years ago. But jewellers still face a number of woes as the domestic market price of gold stands at 2.5% to 3% lower than the prices in the global markets. This means importing gold is more expensive than selling the gold in the country. This gap indicates trouble for jewellers who source their gold from importing banks who in turn buy their gold at higher rates of the London Bullion Market Association (LBMA).

What’s next

The new interest-free gold loan offered by the Chennai-based jewellery could change the current situation. The GL Plus loan is a product of Gold Concepts, a consultancy company with a mission to help jewellers grow their businesses and help the common man invest wisely in gold. If this initiative works well, other jewellers may climb on board. With this scheme, both the jewellery and the customer stand to benefit.

How it works

A customer can pledge their gold and get a loan worth 70% of the gold pledged. For example, if you pledge 10 grams of gold, your loan will be sanctioned for the value of 7 grams. Every month you will have to repay about 0.58 grams. The loan will be available in tenures of 12, 24, 36, 48 or 60 months. Here’s the catch, when you repay your loan, you will be repaying it at the rate of gold in that month. If the rates are lower, your instalment will be low and you stand to benefit. But on the flipside, you also stand to lose if the rates are high, but that’s the risk you have to bear. Once you have repaid your loan, you can redeem your gold in the form of new jewellery from KFJ. Your old jewellery will no longer be available as it will be melted and used to make new jewellery. This may not please some people, but another good catch here is that there are no wastage or making charges on the new jewellery. If you pre-close the loan, then there will be wastage and making charges levied.

How the jeweller benefits

As a jeweller, you will get a better supply of gold for your business. The monthly installments paid by the loan borrower also adds to the working capital. Though the loan is interest-free, there is a processing fee applicable. The value of the loan is determined after removing any stones and the gold is weighed. Melting charges for loss of gold while melting will also be applicable to the customer.

If jewellers source their gold from banks, they get a credit term of 6 months with an interest rate of 3% to 4%. Banks require a guarantee and a mandatory deposit to be maintained. This is usually 30% of the gold sourced. This leads to an increase in the cost of sourcing gold. If the rates in the domestic market fall lower than the bank rate, jewellers face a loss. On the other hand, if jewellers source their gold from customers through gold loans, they don’t need to keep a safety deposit from the pledged gold. The whole amount of gold pledged can be used. Furthermore, they don’t have to pay any interest to the customer.

According to reports on gold supply, the domestic market is facing a world of trouble in meeting demand. Gold sourced from mine production and old gold amounts to 10% of the domestic market supply. The rest of the gold is sourced through imports. This new scheme could give recycled old gold a boost in the market.