Unimoni, a Kerala-based financial services provider, is looking to expand its footprint across India. In an exclusive interview with Bizz Buzz, CA Krishnan R, Director & CEO of Unimoni Financial Services Ltd, sheds light on the gold loan market, emphasizing the importance of risk management for both borrowers and lenders. "There's a misconception that gold loans are risk-free," says CA Krishnan, highlighting the impact of gold price fluctuations on loan terms. He discusses common misconceptions borrowers have and the regulations governing the gold loan industry in India set by the Reserve Bank of India (RBI)

What happens if the price of gold fluctuates significantly during the tenure of the loan?

There is the potential for both borrowers and lenders to experience increased levels of complexity and uncertainty as a result of fluctuations in the price of gold during the duration of a loan. In the event that the loan is secured by gold as collateral, the lender may be required to thoroughly monitor the market value of the collateral in order to guarantee that it satisfies the loan-to-value ratio that was previously agreed upon. Margin calls could be triggered by sharp decreases in the price of gold, which would require borrowers to submit additional collateral or even repay a portion of the loan in order to maintain the needed ratio.

In contrast, if the price of gold goes up, borrowers can find themselves in a more advantageous situation. They might be able to obtain more favourable loan terms, or they might even be able to sell the gold for a profit. In addition, lenders may modify the conditions of the loan in order to reduce their own risks. This may involve increasing the interest rates or tightening the qualifying requirements. Furthermore, borrowers who rely on gold-backed loans for liquidity or investment purposes may need to revaluate their tactics in reaction to the volatility of the market. They may need to consider applying hedging measures or diversifying their portfolios in order to reduce the risks that are connected with price swings.

Overall, due to the dynamic nature of the gold market, it is necessary for both borrowers and lenders to exercise caution in risk management and be flexible in order to successfully navigate potential obstacles and capitalise on opportunities that may present themselves during the duration of the loan.

What are some common misconceptions about gold loans that borrowers should be aware of?

Due to the fact that gold is used as security for gold loans, there is a widespread misunderstanding that these loans are completely risk-free. It is important for borrowers to be aware that fluctuations in the price of gold can have an effect on loan terms and repayment requirements, despite the fact that gold-backed loans provide persons with gold holdings with relatively low-risk borrowing options. In addition, borrowers should be aware that if they fail to make their payments on a gold loan, they may lose the gold that serves as collateral for the loan. This is because lenders have the authority to confiscate and sell the collateral in order to recoup the amount of the loan.

Another common misunderstanding is that gold loans are always the most cost-effective manner of borrowing money. The overall cost of borrowing money can be affected by a number of factors, including processing fees, loan-to-value ratios, and potential penalties for late payments. Borrowers should take into consideration these aspects, even though the interest rates on gold loans may be lower than those on unsecured loans. In order to ensure that they are able to make well-informed decisions regarding their finances, it is vital for borrowers to have a complete understanding of the terms and circumstances of a gold loan before they agree to the loan.

What are the specific regulations or guidelines governing the gold loan industry in India?

Reserve Bank of India is the regulatory authority of the gold loan industry in India. It seeks to put in place a wide range of regulations for this sector so that there can be more transparency, fairness and stability in the lending practices. RBI’s key guidelines outline loan-to-value (LTV) ratios which help to determine what amount of money can be given out by banks against pledged gold as collateral. The lender must also adhere strictly to the Know Your Customer (KYC) norms that prevent any illicit activities thereby making it necessary for the lenders to confirm the identity and address of the applicant.

Another major intervention in this case is the Fair Practices Code (FPC), which establishes fair and transparent policies for various areas including loan application processing, disbursement processes and recovery mechanisms to ensure that borrowers are handled fairly all through their borrowings.

In addition, RBI has come up with clear guidelines on auctioning pledged gold in case of loan default while making it mandatory for certain reporting requirements to increase transparency and regulation. All these measures are aimed at developing an efficient gold loan market in India, thus protecting the interests of both borrowers and lenders hence ensuring the stability of the financial system as a whole

Unimoni is majorly a regional remittance player even today. How do you plan to play Pan-India?

Unimoni was the first to receive the RBI's AD-II licence, confirming our position as a significant remittance player. We are a top Indian player, processing over $750 million in transactions annually. Our strategic objective for FY25 is to aim for a 30 per cent growth trajectory.

With 25 years of operational excellence, we are expanding our services via branch networks, which is the largest among AD-II companies in India with over 311 branches in 16 states and 3 union territories. New branches are planned for the coming financial year.

What challenges can you face as you expand your footprint and how do you plan to tackle them?

Our phygital methodology expands our reach in the digital age. Our online remittance and forex platform (www.remitforex.com) is being developed using new technology. In the upcoming financial year, we hope to streamline external remittance transactions with technology.

The Government of India has introduced a 5 per cent TCS on transactions related to education and medical treatment, and a 20 per cent TCS on other transactions under the Liberalized Remittance Scheme, thereby affecting remittance operations. However, we are actively educating our customers about TCS as an advance tax, highlighting that refunds are possible if their taxable income is lower than the TCS amount, upon filing Income Tax Returns.

How are you using digitisation to provide doorstep gold loans to the discerning customers?

Gold loan digitization improves client experience, operational efficiency, and process efficiency. We offer online/mobile loan top-up facility. Borrowers can increase loan amounts via mobile app. Loan repayments are available via our mobile app/Web. BBPS and Scan & Pay in gold loan collections allow consumers to pay promptly from their phones utilising UPI apps.

We have a terrific concept to bring gold loans to customers. Customer on boarding, loan disbursement, and gold collection will be done by our executives in the customer's home or office. After loan closing, ornaments will be delivered to borrower's home. Digitalisation allows Gold Loan businesses to reach more consumers, decrease paper work, speed up loan processing, and improve data analytics for better decision-making without compromising risk control.

What is the difference between obtaining a gold loan from a bank versus an NBFC?

The distinction between borrowing gold loan from the bank and Non-Banking Financial Company (NBFC) gives borrowers different options, which cater to their particular needs. Banks are providing competitive interest rates to borrowers seeking large financing, particularly non-agricultural loans for personal uses. On the other hand, NBFCs are characterized by flexibility and agility in serving a wider range of customers since they can adjust their loan sizes accordingly.

Despite the rapid growth of gold lending, both the banks and NBFCs have prudently managed their portfolios well with Non-Performing Assets (NPA) on gold loans being lower compared to other types of loans. This positive trend is because of the inherent collateral value of gold, its appreciating prices and sentimental values attached to gold assets that make borrowers selfishly pay back. In general, consumer power is increased through choices between banks and NBFCs encouraging healthy competition among themselves in the gold loan market.