e-cigarette review NEWS: Gold loan companies feel the heat as prices continue to fall

Thursday, April 18, 2013

Gold loan companies feel the heat as prices continue to fall

As gold prices continue to fall, gold loan companies could find the going increasingly difficult. An analysis by The Indian Express shows that these companies have kept a very thin margin for themselves while giving the loans, far lower than the limit set by the Reserve Bank of India.
For the companies, the potential losses are on two fronts. Slim margins are getting wiped out, but the interest cost of loans they have taken from banks and non-banking financial companies remains high — even as the value of the gold held by them dips sharply.
The risks are real. Just six months ago when the price of spot gold had reached a lifetime high of Rs 3,159 per gram in November, the companies were offering loans with effective margins of 23% against the 40% mandated by RBI. That cushion had slipped to 5.6% by Wednesday. When offering the loans, the companies had expected the price to remain the same, or even rise.
The companies accept that the average turnover for the loans is about six months. With current gold prices at Rs 2,569.5 per gram at the MCX, an investor who had taken out a loan against gold in November 2012 now has attractive options at the end of six months. Since her gold was pledged at a higher price, the difference is enough to make good on the interest charges as well. Or she can forego the redemption, as the value of the loan she took out is higher than the price of the gold she mortgaged.
Companies like Manappuram Finance Ltd, one of the two largest operating in the field, are however, certain they are on safe ground, because of the Indian way of thinking.
"There is an emotional attachment to the collateral for the family members and this overrules all other factors and induces the borrower to close the loan and take back the jewellery. Since average life of the gold loan is less than six months maintaining an LTV of 60 per cent, the asset will be sufficient to recover the interest and principal," said I Unnikrishnan, executive director and deputy CEO of the company.


Harivansh Rai on April 19, 2013 at 12:04 AM said...

In India we have an 'unexplained' love for gold. It is regarded as a 'security for rainy days', but actually it stays as an unproductive asset. Although the sheen has been taken away from this yellow metal because of the threat to the lives of those wearing or possessing it, still it is being regarded as a 'status symbol', rarely sported.

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