Shrikant Jadhav, promoter of a small manufacturing units at the outskirts of Mumbai, was surprised when he got a call from the bank to top up his gold loan with additional collateral or pay few instalments in advance.

Jadhav is among many businessmen who are now reworking their gold loan exposure with banks and NBFCs which marketed gold loan as panacea of all liquidity-problems till late last year.

The consistent rally in gold prices while the Covid pandemic was at its peak last year made banks and NBFCs to push gold loan to liquidity starved industries. Moved by the safe-haven factor, the RBI in August increased the LTV (loan-to-value) ratio on gold loans to 90 per cent from 75 per cent.

Prices crash

However, the bull run in gold prices came to an abrupt halt early this year and gold prices crashed from a record high of ₹56,200 per 10 grams last August to ₹46,446 on Monday. The excess liquidity sloshing around in the global economy has pulled down gold prices and expectations are that it may go down further till inflation starts worrying central banks.

PE Mathai, CEO, Muthoottu Mini Financiers said all its gold loans come with mark-to-market limit, which gets triggered when gold loan prices go below a certain point.

“The ultimate aim is not to auction the gold. We contact the customer if prices are coming down to either remit part-payment or bring additional security or close the account,” he added.

For about 15 products, it has also reduced the tenure to 90 days from the earlier 270 days. For the remaining, the tenure was maintained at 270 days but the LTV was brought to 50 to 55 per cent, said Mathew Muthoottu, Managing Director, Muthoottu Mini Financiers.

The organised gold loan books of banks and NBFCs are expected to grow 17 per cent to ₹4.05 lakh crore in FY21 against ₹3.45 lakh crore logged in the previous year.

Customer sentiments

VP Nandakumar, Managing Director, Manappuram Finance said a relatively sharp decline in gold price has affected sentiments and some customers have faced challenges when resetting or renewing their loans at the new LTV which would be lower than their earlier loan.

“We bear the gold price risk for about three to six months versus about 12 to15 months for the other players. That’s because with short term gold loans, the process of recovery through auctions can happen within one quarter of the default,” he added.

PR Somasundaram, Managing Director, World Gold Council said the fall in gold prices will not lead to these loans becoming an NPA as there is enough headroom for the lenders to recover their money.

Umesh Mohanan, Executive Director and CEO, Indel Money said as per the contract with the borrowers, whenever the total outstanding of the loan reaches 90 per cent of the current metal value, a margin call can be made; if it touches 95 per cent, then an auction of the collateral can be a remedy.

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