INTEREST RATE POLICY
The Company fixes the interest rates on gold loans based on the Interest Rate Policy adopted by the Board of Directors in their Meeting.
As per this policy, rate of interest on gold loan schemes are fixed taking into account various factors such as cost of funds, overhead costs, fair return on capital employed, market conditions and guidelines of Reserve Bank of India regarding Fair Practices Code.
The Board of Directors of the Company or a Committee drawing power from the Board, while fixing interest rates on Gold Loan Schemes shall be guided by this policy document on Interest Rate Fixation.
In addition to cost factors set out hereunder, the Board or the Committee shall be guided by the market conditions and various rules and regulations, if any, prescribed by the Reserve Bank of India or such other competent authority from time to time.
Interest charged under various Gold Loan Schemes shall have the following components:
- Basic Interest Rate
- Risk Interest Rate
- Penal Interest Rate
BASIC INTEREST RATE
Basic Interest Rate represents the rate chargeable under every Gold Loan Scheme irrespective of the risk weight attached to the schemes or the type of scheme. Basic Interest shall be arrived at after considering the following aspects:
i. Cost of Working Capital Funds
This component represents the interest and other incidental charges payable by the Company for servicing the borrowed funds deployed by the Company. Major contributing factor to this component includes interest on bank borrowings, other incidental charges thereto and interest payable on Secured Non- Convertible Debentures.
ii. Overhead Cost
Overhead costs comprises of employee cost, establishment costs such as charges for rent, electricity, water etc., security charges such as engagement of security guards, setting up of burglar alarms and CCTV cameras, insurance premium for insuring the gold held in the custody of the Company etc., marketing expenses etc.
iii. Return on Capital Employed
Fair return on capital is calculated as per industry standards and taking into account the interest of investors of the Company which is a listed one. Market conditions include the rate of interest charged for similar loans by Banks and other NBFCs. Guidelines of Reserve Bank of India from time to time also are strictly followed. The Board shall take into consideration a fair return on capital employed which is to be generated by the management for servicing the owners capital employed in the business.
Thus the basic interest rate for the gold loan schemes shall be determined by considering the cost of working capital, overhead cost and fair return on capital employed.
RISK INTEREST RATE
Risk Interest shall be determined by taking into account the degree of risk involved in loans under each loan scheme. While the rate shall be the lowest for the schemes where advance amount vis-à-vis the weight of gold is the lowest, it shall be increased for schemes offering higher advance amount for the same weight. Further, irrespective of the scheme, the risk interest shall also be determined after taking into account the period of the loan as the incidence of risk goes up with the passage of time. Risks in respect of gold loans includes the fall in price of gold, possibility of the gold pledged turning out to be spurious or of low purity, stolen gold being pledged, delays in settling loans of deceased due to legal issues etc.
The interest rate goes up depending upon the periodicity of servicing the interest. Interest servicing within 30 days of disbursal is priced lowest compared to 90 days and so on.
PENAL INTEREST RATE
Penal interest is charged as penalty for non-repayment of the loan dues within the contracted period of 12 months and also to compensate the possibility of loss on account of liability exceeding the realizable value of gold given as security.
The full details of method of calculation of risk interest and penal interest shall be mentioned in the Fair Practices Code approved by the Board of Directors and be published in Company’s Web Site.
The rate of interest of each scheme for each slab period (3 months, 6 months, 12 months) etc. are clearly mentioned in the pledge form as well as the sanction letter issued to the borrower.