Gold Prices Volatility Prompts Banks To Turn Cautious On Lending

Banks have begun implementing tighter controls on their gold loan businesses, as gold prices have experienced volatility. According to at least three bankers in the know, measures include cutting loan-to-value ratios, reducing loan tenures, and even tightening underwriting standards.

While the Reserve Bank of India allows banks to extend up to 85% of the value of the gold in the form of loans, banks feel this offers too thin a margin of safety. In any case, the 85% limit includes interest payments due to banks. Banks are preferring to reduce the loan-to-value ratio to 65-70% for new loans. Additionally, banks are also stepping up end-use checks for gold loans, the first banker quoted above said.

Gold loans are typically considered a safe product owing to the high-value collateral in place. However, the recent spike and fall in global gold prices are resulting in some worries among lenders. Gold prices reached nearly $4,200 in recent weeks, then fell about 6% this week. During the festive period in India, demand for gold jewellery increases, resulting in a sharp rise in domestic sales as well.

While consumption-linked gold loans are the primary driver of the business, banks are closely checking repayment history and velocity of borrowing to ensure the quality of their books remains good, the second banker said.

Lenders are also stepping up recovery and auction proceedings for borrowers who are defaulting on their dues. This is to ensure that they can exit the loan contract soon with maximum recoveries, the third banker added.

In recent months, gold loans borrowed by micro, small, and medium enterprises have shot up, contributing nearly 15% of gold loans. This is also something banks are closely watching to ensure that MSMEs don’t end up defaulting on their dues at a large scale.

As the loan dues are typically higher for such borrowers, banks have more to lose in such cases, the first two bankers added.