Name: Rehan Ehsan Contact# +92 321 8880397 rehan.ehsan89@gmail.

com

PROJECT FOR FINANCING AGAINST GOLD AS COLLATERAL:

(A Project for Microfinance, institution name kept hidden)

Gold as Collateral
People often have some urgent need off cash and the situation may be such that they cannot afford to go around looking for a personal Loan or taking an unsecured loan from family or friend. At such times taking a loan against gold can be very convenient and quick. Since jewelry hold lot of emotions of people so it itself is much securitized collateral, and so the gold too hold lot of emotional values for people, the gold is maintained by the bank in the same form.

FLASHBACK:
For Pakistan, State Bank of Pakistan by issuing circular has declared the gold a 100% secured collateral for the bank borrowing. The Bank would not be required to allocate a certain amount of capital against the loan extended against gold. The Senior analyst of State Bank of Pakistan noted that the microfinance banks, after the categorization of gold as risk free collateral would now be able to hold more capital to be lent out to small borrowers (June 02, 2011-Pakistan Today). In India, JB Morgan Bank states in its report the Gold as risk-free collateral for the small borrowers,Microfinance Banks and commercial banks.They give gold Triple (A) Minus (AAA-) Rating as collateral against financing. The Gold Council Director of Government affairs stated that Gold is increasingly being used as collateral around the world. All these moves reflect a growing recognition of goods roll as high quality liquidates assets. Why Gold approved to be used as collateral against Financing: The reason why gold approved to be used as collateral is: 1. emotionally: it has always been dear to every person since the very first day, 2. Financially: Based on the Historical data, gold prices are stable since the very first day and still have an increasing trend. (Increasing trend is in the manner that Gold prices always rises in the country where inflation, bad governance, political instability factors are there. 3. Also over the last decade gold prices are going upwards and upwards, as on today price of Per Tola Gold is @ 56,610 PKR.

Examples:
Under mentioned banks are working in process of financing against gold: 1- National Bank of Pakistan 2- Tameer Microfinance Bank Limited Pakistan 3- ICICI Bank India 4- HDFC Microfinance Bank India National Bank of Pakistan: According to online research, National Bank of Pakistan is working with the product Cash n Gold- (in cash and meet your needs).

Name: Rehan Ehsan Contact# +92 321 8880397 rehan.ehsan89@gmail.com

Process: They fixed 35000 PKR against each 10Gms of Gold weight. As much gold you own as much cash you received @ 35000 for each 10gms. Repayment period is under one year tenor and roll over facility is also available. Further no penalty for late repayment. Tameer Microfinance Bank Limited Pakistan Tameer Bank is the first Microfinance Bank in Pakistan introduces Finance against gold as collateral. They name this product as Tameer Emergency Karza-(Tameer Emergency Loan). Process: They promised to give the loan in maximum 2 hours of time from filing of form. When customer walk-in to Branch, they first get all the necessary details from him/her verbally and start socializing as customer should not feel that bank is wasting his/her time. After that they offer him to fill form which is their mandatory part of Loan process and time of 2 hours start. With the submission of form, customer deposits its Gold collateral to the Bank and they start process. They checked originality of gold and get the value of it. After this process they intimate customer regarding the gold price of the day and worth of the ornament he/she own and offer the loan @ 60%-70% (depends on the customer worthiness). Interest rate they charges is @ 29% and repayment is in 1 whole year in 12 monthly installments. (As let say customer owes Gold ornaments of worth 100,000 PKR- Tameer Bank provide him the Loan of 70,000 PKR@ 29% interest so total Liability of the client is now 90,300/- (7525) which will be paid in equal monthly installments). ICICI Bank India ICICI bank of Indian is one of the Leading commercial Banks which is providing Financing against gold collateral. They Design this service for the requirements for Microfinance entrepreneurs basically although ICICI bank is not a MFI. (Their Moto isGOLD ORNAMENT LYING IDLE CAN BE PUT TO PRODUCTIVE USE BY AVAILING LOAN AGAINST GOLD & GOLG ORNAMENTS). They Promise to provide Hassle free quick processing with simple paper work charging very minimal interest rate. Loan ranges from 10,000 Indian Currency to 1,500,000 Indian Currency. HDFC Microfinance Bank India HDFC bank is the one of the Largest Microfinance Bank providing the Loan against Gold Security. On research we find the following benefits: Assurance of Gold Securities and Loan will be provided at 100% appraised gold value at very low interest rates having quick and easy documentations. They name their Product as (Loan Against Gold-Come with the gold and get the cash in 15 Minutes). Surprised? Yes, they actually attract the client to walk in to Branch and try to trap them. They in real do not give loan in 15 Minutes nor do they give the 100% of the value of it. Their actual process is they try to have more and more gold reserves with them. When the customer walksin, they first ask them for Quantity of Gold, (No matter what the quality

Name: Rehan Ehsan Contact# +92 321 8880397 rehan.ehsan89@gmail.com

is). After evaluating the gold they asked the customer for their need of Loan, They Proposed the Loan amount themselves, as if Gold value of 100,000 and client demand the same, they provide the 80,000 @ interest rate of 2% per month and re-payment will be in 12 months which sum up to 24% for the year & if Customer delays to pay payment on Due Date it would charge @ 2% as a penalty for that installment and further more to this is that bank has no proper place to keep the ornaments of Clients. They can even get the ornaments sold out if the gold prices going to fall without notifying it to client.

CONCULSION: In the above mentioned research and having different examples I came to propose conclusion that Gold is very good Collateral against financing and we should definitely start this product. Procedures what we need to adopt should be like, e.g. if client comes in with gold of value 90,000 PKR. Propose him 70% of this amount which will be 63,000 PKR @ an interest rate of approx. 20% annually so interest would be 12,600 PKR. Our total receivable from the person is 75,600 PKR. Still we have 14,400 PKR of the person as a security deposit and prepayment schedule to be shared immediately with the client before disbursement as payments will be in 12 equal installments (also all other operational procedures already implemented with other Financing area client e.g. Signed Blank cheques from the client). Secondly we need to win the confidence of our client that his/her ornaments will be safe with us and we will for return him in original after complete settlement of Liability.