How Is The Valuation Of Gold Decided For Gold Loan

I. Introduction

• Brief explanation of what a gold loan is : Gold loan as the name suggests is a form of lending which is secured by the borrower's gold collateral. The borrower is supposed to repay the principal along with applicable charges and interests, and upon the complete settlement of the loan, the lender releases the gold back to the borrower. This is a great way to secure funds for borrowers who may not meet the required criteria set forth by the lenders.

• Importance of gold valuation in the loan process : Gold valuation is an extremely important step in the gold loan process. The valuation process helps the lender determine the value of the gold collateral, basis which the lender further assesses how much money can be lent to the borrower. Without knowing the real value of the gold, it would be highly impractical for the lender to provide the loan.

• Purpose of the article: Many borrowers are either unaware or have misconceptions regarding the valuation method and approach of the lenders. In this article we will be demystifying how lenders assess the value of the gold and the factors affecting gold loan valuation.

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II. What Is Gold Valuation in the Context of a Gold Loan?

• Definition of gold valuation : Gold valuation is a process by which the lender assesses the gold which is to be secured as a collateral to find its real worth as per the market price.

• Role in determining loan amount (Loan-to-Value ratio) : Valuation process plays a crucial role in determining how much loan can a lender provide to the borrower based on the underlying collateral. Upon determining the value of the metal, the lenders provide loans as per the prevailing loan to value ratio. The loan to value ratio for gold loans is set to a maximum of 75%. What this means is that whatever is the market value of the borrower’s gold collateral, 75% of that value can be given as a loan by the lenders. It is the most robust way of gold loan amount determination based on the value of the gold.

• Impact on loan terms (interest rate, tenure, etc.) : Gold valuation also has an impact on the loan terms. The higher the gold value, and higher the loan amount, higher will be the interest and other charges. Thankfully, Indiagold offers gold loans at a highly competitive rate and charges.

III. Key Factors That Influence Gold Valuation

1. Purity of Gold

• Karat system (e.g., 22K, 24K) : Gold purity and loan valuation goes hand in hand. Purity has the biggest impact on its valuation. Since gold is naturally a very malleable metal, it is unfit to use in its raw form, hence a certain percentage of other alloys are mixed to provide the much needed strength. The purity after mixing the alloys is measured in karats. 24 karat means gold in its purest form, whereas 22 karat gold means that the metal is an alloy with only 91.6% pure gold.

• How purity is verified (karat meter, hallmarking) : There are many ways to determine the purity of gold. Most common one being checking for the hallmark symbol on the metal. Hallmark is a certification done by the Bureau of Indian standards (BIS), other methods of checking purity includes karat meter, acid test, among others.

2. Weight of the Gold

• How gold is weighed (excluding stones or non-gold parts) : An accurate gold valuation is highly dependent on the purity and weight of the gold. Now, since a gold ornament can include additional non-gold materials like diamonds, stones, etc. taking the gross weight into account would be foolish. For measuring the accurate net weight of gold in a jewellery specialised devices are used, and many valuation professionals also rely on fair judgement, invoice of the gold, and a mix of other factors.

• Importance of accurate measurement : Accurate measurement is imperative in the gold valuation process. It allows the valuation professional to

3. Current Market Price

• Use of daily gold market rates : Gold is an internationally traded metal and its market is constantly changing. The international as well as national rates published by RBI, IBJA, and local bullion markets serve as a great benchmark for the buyers, sellers, as well as the lenders and borrowers.

4. Type of Gold Item

• Coins, bars, and jewellery: Gold being the malleable metal that it is, it has a number of use cases where the metal can be given a form to serve a purpose. Gold can be made into utensils, jewellery, coins and bars, etc.The differences in valuation arises from purity of gold. Gold in the form of coins and bars are generally considered of high purity usually between 91.6% to 99.99% One can identify the purity level by checking for hallmark or relying on other purity tests.

• Deductions for impurities, alloy, or design : While selling a gold ornament/bars or even while collateralising the same, only the value of pure gold is considered. So if you have a gold with 22 karat or 91.6% purity, then the value will only be accounted for the percentage purity of gold in the alloy.

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IV. How Banks and NBFCs Determine Gold Value

• Standard valuation process followed by financial institutions : Financial institutions follow highly reliable processes to determine gold value, this includes using scientific methods such as devices and other reliable methods such as checking for hallmark, etc.

• Use of conservative pricing to manage risk : While making purchase or lending decisions, financial institutions usually follow a conservative pricing model to mitigate the risks that can arise due to purity issues, misrepresentation, market value volatility among others.

V. Loan-to-Value (LTV) Ratio and Its Role

• Explanation of LTV (typically up to 75% in India as per RBI norms) : LTV stands for loan to value. It is a ratio that determines the ratio of money that can be lent as a gold loan in proportion to the value of the gold collateral. The Reserve Bank of India has put a cap on the maximum LTV at 75% i.e. a maximum of 75% of gold's value can be given as a loan. However, the LTV calculation can be different for different lenders. If you’re looking to get a maximum loan for your gold collateral, it is essential to borrow from lenders like indiagold who offer a high LTV.

• Example calculation : Lets suppose the market value of your gold collateral is INR 100,000 and the lender is offering a LTV of 75% then the maximum loan that can be taken against that gold collateral would be INR 75,000. The borrower however can take a lesser loan if they wish.

• Why lenders don’t offer 100% of the gold’s market value : Gold’s price changes constantly, and can vary greatly in periods of uncertainty in the financial markets. To account for that risk, the lenders don’t offer 100% of the gold’s value

VI. Documentation and Verification Process

• Documents required for gold loan : Availing a gold loan is a fairly straightforward and easy process with minimal documentation requirement. As opposed to other lending products such as personal loans, all that a borrower needs to make a gold loan application is an identity proof, an address proof, form 60/PAN card and 2 passport sized photographs.

• Security and insurance of pledged gold : The collateralised gold is kept securely in vaults, indiagold offers 100%security and insurance on the pledged gold, so you can rest assured that your gold is safe with indiagold.

VII. Common Misconceptions About Gold Valuation

• Myth: The more decorative the jewelry, the higher the value. Well this may hold true while purchasing new jewellery as the jewellers may charge a markup and making fee for a more decorative jewellery. But in the secondary market while selling or even while collateralising the gold, only the pure value of the gold is considered.

VIII. Tips to Get the Best Value for Your Gold

• Choosing hallmarked gold : hallmarking is done by the Bureau of Indian Standards (BIS), it is the recognised and authorised agency to grade gold as per its purity levels. It is recommended to always choose gold with BIS certification/marking, as it helps in avoiding any possible scams relating to overvaluation of gold. BIS hallmarking essentially helps the buyer ensure that they are paying the right price for what they are buying.

• Cleaning gold before evaluation : Cleaning gold before evaluation is quite important. As much of the gold that is used as a collateral to secure gold loans, more often than not the gold carries dirt, which essentially inflates the weight of the ornament, further time is then spent in estimating the true weight of the gold without the dirt. Hence, it is recommended to always clean the gold jewellery thoroughly before evaluation to ensure that accurate weight and valuation can be done.

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