Gold has always been a reliable financial asset, especially in times of emergency. With its high liquidity, gold can be easily pledged to banks and financial institutions to secure a loan within minutes. Typically, gold loans are available at low interest rates, with the added advantage that no documentation is required. However, the current system of gold-backed lending institutions has faced scrutiny due to some irregularities.
As of now, borrowers opting for gold loans have to repay the entire loan in a lump sum after the completion of the loan term, a repayment method known as the “bullet repayment” option. If the borrower has sufficient funds before the loan tenure ends, they can repay the principal and interest in full and retrieve the pledged gold. However, this method can create financial stress for borrowers who are unable to pay the entire loan amount at once.
In response to these concerns, the Reserve Bank of India (RBI) is considering introducing a facility for borrowers to repay gold loans in easy monthly installments (EMIs). This shift aims to address several issues in the current gold loan system, particularly those related to long-term loans and the lack of transparency in gold loan auctions.
The RBI has identified significant irregularities in the gold loan market. One of the major concerns is the inconsistency in determining the value of gold, which can lead to borrowers being charged more than what their gold is worth. Additionally, the auction process for seized gold has been criticized for its lack of transparency, leaving room for misuse.
Moreover, the RBI has observed that many lenders are offering long-term gold loans, allowing customers to make periodic interest payments while extending the loan for years without requiring principal repayment. This policy has sparked concerns about the financial strain it may impose on borrowers over time.
In light of these issues, the RBI recently issued a circular stating that it is considering the introduction of monthly installment options for gold loans. If implemented, this move could bring more flexibility to borrowers and ensure greater fairness and transparency in the gold loan sector.
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