COVID-19 Gold Loan, Impact & Moratorium

The domestic jewellery and gold consumer demand is dependent on a specific budget and due to the lockdown, overall reduction has been seen in disposable income. If gold prices continue to increase which is happening currently, it will have a negative impact on the overall demand.

As per the report by Inda-Ra, the demand for gold will remain muted till September 2021 and business from rural areas and weddings may remain resilient. From October 2021, sales are likely to improve and sharp recovery is expected afterwards due to the festive, wedding season and normalization in economic activities. However, if the pandemic continues to evolve, it can have a prolonged negative impact on gold demand.

In the long-term, experts believe that demand for gold jewellery will be supported by the rise in savings due to postponement of purchases and cancellation of travel plans among other reasons. However, it remains to be seen whether such savings would add to jewellery demand or will be used in compensating loss of income or saved for emergency situations.

Many experts believe that the gold industry is expected to bounce back after 2021 with increasing gold rates and continued attraction to gold jewellery due to traditional factors.

As the scale of the pandemic and its potential economic impact started to emerge, investors are looking for safe-haven assets and investment in gold seems to have emerged largely due to worsening economic scenarios across the world. The slowdown in global growth along with geopolitical stress would continue to keep the price afloat. So, the current situation is a good time to slightly increase your gold investments in a bid to diversify. Different gold investment options have been discussed in briefly below

• Digital Gold: During the lockdown, one can invest in gold via digital wallets such as Paytm, Amazon, Freecharge. Your gold investment is backed by 24K purity which you can either redeem once the gold prices further appreciate or get it delivered in physical form once the lockdown ends.
• Indian Gold Coin (National gold coin): It is the first ever national gold coin with 24K purity and 999 fineness. As an identification mark, it has the Ashoka Chakra on one side and Mahatma Gandhi on the other side. Available in denominations of 5, 10, 20 grams, it carries counterfeit features and tamper-proof packaging. These are minted by the Security Printing and Minting Corporation of India Limited (SPMCIL) and hallmarked by the BIS

For an investor looking to invest in gold in paper form, here are your options:

• Gold ETFs: Huge inflows were seen in gold funds of 298 tonnes-seven fold increase and highest quarterly addition since 2016, pushing global holdings in these products to a new record high of 3,185 tonnes in the March quarter as per the report of the World gold council.
• Sovereign Gold Bond: RBI every year launches these bonds in different tranches which an investor can buy from as low as 1 gram to maximum up to 4 KG. It comes with an 8 year lock-in period but can be redeemed after 5 years. It tracks the price of gold and pays an interest of 2.5% per annum. If one doesn’t wish to wait for the RBI tranches, s/he can also buy from stock exchanges during the trading hours.

Here is the comparison between these two on basic aspects:

• Return: SGBs are government securities and pay an assured interest of 2.5% whereas Gold ETF also tracks the prices of 24K gold but doesn’t assure return and could result in lower actual returns since that is determined on the price of gold on the trading exchange on the day of sale.
• Collateral: SBGs can be used as collateral for a loan from a bank unlike a Gold ETF.
• Tax: Gold ETFs attract an LTCG of 20.8% with indexation benefits when the holding period is over 3 years and interest on SGBs are exempted from capital gains tax upon redemption

In accordance with RBI Covid-19 regulatory package, banks and NBFCs offering gold loan service to their customers will extend a moratorium involving deferment of instalments for a period up to 3 months. For instance, if your installment (interest and principal) is falling between March 1, 2020 and May 31, 2020, one can choose to pay afterwards as a relief measure by RBI to those whose income/cash flows are affected by COVID-19.

By availing the moratorium option, you will defer your immediate instalments/EMIs. One should know there is no concession or waiver in interest or principal offered by RBI. The interest will continue to accrue for the period of moratorium and this interest will be added to your outstanding principal.

Eligible borrowers who wish to take advantage of this scheme will have to “opt in” by submitting an application given on the website of the bank one have taken loan from along with a scanned copy of signed request letter duly signed by Borrowers, guarantors and co-obligants.

In this case, the respective bank/NBFC will not ask for EMI till 31st May 2020 but the interest will continue to accrue on the outstanding principal at the interest rate you have taken gold loan from.

Although RBI has permitted all banks and NBFCs to offer moratorium, listed below are some of the banks providing the same:

• Manappuram
• Muthoot
• Axis Bank
• Federal Bank
• ICICI Bank
• HDFC Bank
• IIFL
• Kotak Mahindra Bank

If your income to service interest on your gold loan is sufficient or you have the financial capacity, then it is suggested to continue to pay your accrued interest (i.e. without availing moratorium). However, if your income or cash flow is affected then you can pay after the end of the moratorium period. Here one should know that interest accruing during this three month period shall be added to the principal to be repaid through future EMIs/instalments as may be fixed by the respective banks/NBFCs. Here are the options through which borrower can make the payment of the deferred EMIs/Instalments with accrued interest:

• By distributing the accrued interest component uniformly in the remaining EMIs
• Adding the interest during the moratorium to the last one or last three instalments
• Additional EMIs/Instalments at the end of the current contracted period

• Deferred principal along with interest shall be repaid within a maximum period of 24 months, if the remaining tenure/period of loan is longer.
• Moratorium is applicable for installments and interest payments falling due between March 1, 2020 and May 31, 2020
• Borrowers who have opted in for the moratorium can also opt out and revert to the original terms and conditions after giving intimation to the company in writing. In this case, prepayment charges will not be applicable. However, this condition varies from bank to bank