Can gold overdraft hack beat bank locker waitlists?

Enter gold OD

Gold overdraft (OD) facility can be a hack for those looking for a locker facility for their gold jewellery. The OD facility entails extension of a credit line or OD facility from the bank, against collateralization of a gold asset. This gold is stored by the bank in its vault.

As it is an OD facility, the interest costs only come into play when you start drawing funds from the OD facility. Interest costs are not incurred otherwise.

There are still some other costs. This includes 1-2% processing fee (of the OD amount), stamp duty and gold valuation fees.

For instance, on a gold OD of ₹2 lakh, the processing fee will come to ₹2,000 (assuming 1% processing fee), stamp duty of ₹600 and gold valuation fees of ₹500. The processing fee and stamp duty will be recurring as and when the overdraft tenure is extended. The valuation fee will vary based on the value of the gold. In some cases, banks will embed the stamp duty charges within the processing fee.

Sharad Ingule, former founder of GoldUno, says that banks offer gold loan overdraft schemes at nominal processing fees. “Since interest is charged only when you actually use the overdraft, the overall cost may end up being lower than what you’d pay for a bank locker just to store your gold,” he said.

Advantages versus bank locker

The costs for getting a locker start from ₹2,500 in annual rent (for small-sized lockers), with an additional 18% GST (goods and services tax) and ₹500 as stamp duty. The annual rent of a medium-sized locker could be ₹4,000- ₹5,000 (varies across banks). On the higher side, the annual locker rent can start from ₹7,000 for large-sized lockers. Rules allow banks to ask customer to make a security deposit. This is to cover for scenarios where the customer suddenly stops paying annual rent and the bank needs to bear the costs of breaking the locker. 

Banks may face potential situations where the locker-hirer neither operates the locker nor pays the rent. According to RBI (Reserve Bank of India) rules, to ensure prompt payment of locker rent, banks are allowed to obtain a term deposit, which would cover three years’ rent and the charges for breaking open the locker in case of such an eventuality.

When you keep your gold in bank locker, it is not insured. “The banks don’t know the contents of the locker. Their liability is capped in proportion to the locker charges in case the contents of the locker are damaged or stolen. To be on the safer side, you may want to insure your jewellery no matter where you secure it,” said Adhil Shetty, chief executive officer of BankBazaar.

As per RBI rules, banks cannot be held responsible for the actual contents unless the loss occurs due to theft, burglary, fire, or staff negligence. Even then, the liability is capped at 100 times the annual locker rent. So, if your locker rent is ₹5,000, the compensation maxes out at ₹5 lakh.

On the other hand, gold kept as collateral is insured by the bank as it is aware of the value of the gold and needs to protect it. For bank it is a liability, which it needs to clear once the customer clears dues (if any).

Caveats

Keep in mind that not all banks offer gold OD. Smaller banks might be more flexible and offer such a product. “In some cases, the customers will have to negotiate with the bank to get gold OD facility,” Ingule said.

Remember that gold OD is a loan product at the end of the day. The bank marks a lien on the gold, which means it has a legal claim or right over the gold. It essentially means the lender holds a “hold” on the gold until the loan is repaid. If the borrower defaults on the loan, the lender can seize and sell the gold to recover their money.

So, use such a facility in lieu of bank locker if you are sure that you won’t need to draw on the overdraft facility. If the facility is utilized, there will be interest costs and if dues are not settled within stipulated timelines, the bank can even auction the gold jewellery to recover dues.

The interest rates on OD facility is likely to be slightly higher than the regular gold loan facility. “As the bank is offering flexibility through this type of loan, expect it to charge slightly higher rate,” said Raj Khosla, managing director and founder of MyMoneyMantra.com.

Gold loan facility starts from 8%s, depending on the size of the loan. The bank may offer certain concession if the loan amount is higher. The gold OD facility is likely to be 1% higher than regular gold loans.