When gold prices fall, the value of gold with the bank (against which loans have been given) also declines.
Following a sharp drop in gold prices on Monday, banks and gold loan companies have swung into action.
Such lenders, who offer loans against the yellow metal, are now asking customers to make part-payments of the loans immediately.
In case gold prices fall further, banks and gold loan non-banking financial companies will scale down their loan-to-value ratio (the ratio of a loan to the value of an asset purchased) for gold loans.
The Reserve Bank of India has mandated the ratio at 75 per cent; if prices see a steep fall, lenders will be at the risk of exceeding the limit.
Gold prices fell to a five-year low of less than $1,100/ounce in global markets in early trade on Monday.
At the bullion market in Mumbau, standard gold fell by Rs 370 to close at Rs 25,550/10g on Monday; on Tuesday, it declined further to close at Rs 25,400/10g.
“We fix the LTV at the beginning of every month and we keep a comfortable margin to avoid any volatility in prices.
Therefore, we don’t have to adjust the LTV immediately.
"But this morning, we sent notices to all our branches to get in touch with gold loan customers and ask them to make part-repayments of the principal amounts in required cases,” said Rakesh Sharma, managing director and chief executive, Lakshmi Vilas Bank.
When gold prices fall, the value of gold with the bank (against which loans have been given) also declines.
Therefore, lenders ask customers to pre-pay a certain amount.
Sharma said usually, lenders gave a week’s time, which could be extended, depending on the loan amount and the customer.
But despite this, if a customer failed to pay, the gold was auctioned by the lender, he added.
Federal Bank, too, sent notices to its customers on Tuesday morning, asking them to pre-pay a part of the principal. K A Babu, head (retail business), Federal Bank, said though the LTV wasn’t changed, the recovery process had begun.
“We have been cautious on lending against gold because of the price fluctuation. Our LTV is such that the drop in prices is factored in.
"But in cases where the loan amount becomes more or is very close to the gold in our custody, we have started contacting customers to make payments,” he said.
NBFCs are also planning similar moves.
“The Association of Gold Loan Companies will take a call on whether to change the LTV ratio.
"As of now, it hasn’t decided. Currently, it is 75 per cent of the average of the gold prices in the past 30 days.
"But to maintain healthy asset quality, we might take a call soon on whether to ask customers who have not paid their dues in six months or so to make part-payment of the gold loan or bring additional gold,” said S Kannan, executive vice-president, Muthoot Fincorp.
Last year, RBI had barred banks from offering gold loans worth more than 75 per cent of the value of gold jewellery and ornaments.
This was aimed at ensuring a level playing field between banks and NBFCs offering such loans.
Initially, the central bank had restricted the LTV ratio for gold loan NBFCs at 60 per cent. Last year, it increased the cap.
Anticipating a fall in gold prices, a few in this business had already cut LTV ratios for one-year loans.
“Since June 2014, we have been giving 12-month loans at 65 per cent LTV, compared with the 75 per cent permissible limit, thereby de-risking our gold loans from fluctuations in gold prices.
"We are giving 75 per cent LTV for three-month loans,” said Kapil Krishan, group chief financial officer, Manappuram Finance.
