Gold loans have become more popular during this pandemic. In August, the Reserve Bank of India (RBI’s) allowed lenders to offer a loan-to-value (LTV) ratio of 90 per cent on gold loans, up from 75 per cent. While some banks and finance firms give gold loans, others such as DCB Bank offer overdraft gold loans. In an interaction with Hiral Thanawala of Moneycontrol, Praveen Kutty, Head Retail and SME Banking at DCB Bank discusses on gold loans and also on the bank’s feature of providing insurance benefits with fixed deposits and- contrary to perception- why that won’t lead to mis-selling.
Gold loans have become attractive due to a higher LTV. Do you see demand for gold loans picking up?
Yes. The demand for gold loans is high as people are going through tough times. A gold loan serves the community that otherwise does not have the luxury of taking a business, property or personal loans. The borrowers who are not eligible for these loan products are eligible for gold loans if they have gold to pledge. These days, people are applying for gold loans to purchase laptops for children’s education, pay for medical treatment, buy raw materials to sustain their businesses, etc.
What are the important factors to consider while applying for a gold loan?
Many people are not used to operating an overdraft account. So, they don’t know that monthly servicing of interest is absolutely critical. Technically, the gold loan borrower becomes a non-performing asset (NPA) if they don’t service the interest to the bank on the overdraft gold loan account for three months, even if the balance he has utilized is well below the sanctioned limits.
You should always ensure that your outstanding loan is less than the credit line offered against gold deposited with the bank.
As the loan moratorium period ended in August, what is the repayment option offered by your bank to borrowers?
Increasing the equated monthly instalments (EMIs) immediately after the end of the moratorium period is not an option customers want. Borrowers will find it difficult to repay increased EMIs due to a possible financial crunch. Therefore, the moratorium period has resulted in extension of tenor for those customers who have taken this facility.
How have investments in fixed deposits changed during this COVID-19 pandemic?
Over the last five months, our retail deposits have been growing at a steady pace. Customers have been putting more money in the fixed deposits, despite interest rates coming down. For instance, we are giving 40 basis points lower interest now on fixed deposits compared to March 2020. In March, we offered a peak rate of 7.35 per cent a year and now we are offering a peak rate of 6.95 per cent on fixed deposits.
The core reason for increased flows in fixed deposits is the external environment. In this pandemic, customers’ behaviour has changed. They now favour saving more. Also, retail investors now have fewer avenues to spend, due to the lockdown. So, there has been an increase in savings.
Many investors are increasingly reticent about investing in the equity markets. Several customers prefer to invest in FDs, as returns are fixed unlike market led instruments. Most of the customers have locked-in funds in fixed deposits for long tenures, i.e., three years or more, because interest rates are considerably better in that bracket.
How different is the life insurance you offer along with deposits, compared to others in the industry?
In our Suraksha fixed deposit, we offer complementary life insurance cover, through Aditya Birla Sun Life Insurance, to eligible customers from 18 to 55. The maximum life cover is Rs 50 lakh. Our fixed deposit scheme is different from others as the minimum amount for investing in this fixed deposit is Rs 10,000. At other banks the minimum investment amount is higher for similar fixed deposit schemes. Also, our age limit is higher when compared to other banks. The maximum sum assured for a customer with DCB Suraksha Fixed Deposit is up to five times higher in some cases.
Financial advisors recommend keeping investment and insurance separate to investors. By clubbing insurance benefits, don’t you think investors could be mis-sold FDs when they don’t need one?
In our life, it’s important to have a standalone insurance policy for the long tenure. So, if you want to take a pure life insurance policy then prefer term plans, because they will give you insurance cover for the next 20-40 years, depending on the age you are taking the policy.
However, our complimentary life insurance benefit with fixed deposits is like an additional life cover on your investment with no added cost to investors. The life cover is for three years from the date of investment. This is an added benefit which benefits the family in the unfortunate event of the death of the Suraksha Fixed Deposit account holder during the tenure of the fixed deposit.