Mis-selling: Is your bank asking you to pledge gold to save on locker rent?

When Mumbai-based Aakash Saxena, 36, needed Rs 5 lakh in June for a medical emergency, he could manage only Rs 2 lakh by liquidating his fixed deposit. Upon sensing that he fell short of his target, his bank’s relationship manager came up with a plan. So, he was asked to surrender the locker, to save upon the annual locker charges of Rs 8,000 that he was paying, and instead apply for a gold loan. Since he used the locker to just store gold, the banker suggested that he pledge his gold. “It was tempting. My gold was in the bank’s possession, so I felt I didn’t need the locker. I agreed to take a gold loan and surrendered my bank locker,” says Aakash.

Meanwhile, Aakash ended up paying a processing fee of 1 per cent on his gold loan, stamp duty and gold valuation fees as additional charges to the bank. Beyond this, the bank charges an interest of 9.5 per cent annually.

The aggressive sales pitch for gold loans

Gold loans have become popular in this COVID-19 pandemic, as gold prices crossed Rs 50,000 per 10 gram. The Reserve Bank of India (RBI) has allowed an increase in the loan-to-value (LTV) ratio for loans against pledged gold to 90 per cent, from 75 per cent till March 31, 2021. This means, you can get a loan for up to 90 percent of your gold’s value.

Interest rates on gold loan (they start from about 7.40 percent) are lower compared to those on personal loans. Sharad Ingule, Founder and CEO of GOLDUNO, says that banks offer gold loan overdraft schemes at nominal processing fees. “Here, you only pay interest if you use your overdraft facility. In case you do not use the credit facility, you pay less than bank locker charges if you had used one to store your gold,” says Sharad. Hence, such gold loan schemes are pushed by the banks.

“This is a sales pitch from banks that nudge you to take a gold loan overdraft facility and keep your ornaments secured with them. You will save on rental cost of your individual locker and get insurance on pledged gold. Customers fall into this debt trap by giving up the locker facility and taking a credit line from the bank,” says Raj Khosla, Managing Director and Founder, MyMoneyMantra.

Bank lockers cannot be substituted

This sales pitch that undersells your need to have your own bank locker doesn’t account for an important fact. “A bank locker is used for safe storage of multiple items besides gold ornaments such as agreements, diamond jewellery, silver products, insurance policies, Will, etc. and the gold loan overdraft facility cannot be substituted for bank lockers,” claims Mohan K, Vice President and Country Head of Agri, Micro and Rural Banking at Federal Bank.

“By recommending gold loans against bank lockers, some of the bankers appear interested in taking away accumulated gold jewellery of middle-class borrowers. This is not an ethical practice. Banks are eyeing the pledged gold with them if you fail to repay,” says Khosla.

For a bank locker, you only need to pay an annual rent, whereas on a gold loan there are multiple costs involved whenever you withdraw from the pledged gold and deposit back. A gold loan is a liability, which has costs attached. You shouldn’t give up the locker facility to take on debt.

Pitfalls of taking gold loan against bank locker

You will have to service the interest on the gold loan every month in case of a monthly repayment scheme and if you default, it would hurt your credit history. “Banks would also recover their dues in the event of loans turning into non-performing assets (NPAs) through an auction of the pledged gold jewellery,” says Ingule.

Some banks charge late payment and foreclosure fees, about which you need be aware of before signing the loan agreement.

When your gold jewellery is pledged for a loan, banks test for purity. Gaurav Gupta, Co-founder and CEO of MyLoanCare.in says, “You have to understand that when purity testing is done, there is a marginal damage to the jewellery. So, you need to ask whether you really want to present your gold jewellery for testing, only for the purpose of saving rent on a bank locker.”

Recently, gold prices declined 10-12 per cent from their peak, in the Indian market. If such downfall continues, soon it will have a negative impact on your gold loan if you have borrowed up to 90 per cent as per the new LTV. Khosla says, “In such a situation and declining gold prices, a bank will ask for more gold ornaments as pledge or it will auction your gold jewellery. Never apply for a gold loan with a given limit of up to 90 per cent even if it’s available, as it’s risky. You should settle for a gold loan for up to 60-70 per cent of the pledged gold.”