How will gold price impact borrowers? | Mint
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Business News/ Money / Personal Finance/  How will gold price impact borrowers?
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How will gold price impact borrowers?

A correction in gold price means that the borrower will get a lesser loan amount

Photo: MintPremium
Photo: Mint

As the coronavirus pandemic continues to spread across the world, a large number of people have been hit hard by financial setbacks. Many have lost their jobs or their businesses have been shut down.

In India, a large number of people have opted for gold loans to fulfil their urgent fund requirements as it is convenient to get a gold loan due to less paperwork.

Generally, these are short-term loans with a tenure extending up to one year.

However, the price of gold has corrected by more than 20% from its peak and is currently hovering around 46,000 per 10 gm.

So, let’s understand what this correction in the price of the precious commodity means for new and existing gold loan borrowers.

New borrowers

A correction in gold price means that the borrower will get a lesser loan amount. Currently, banks and non-banking finance companies (NBFCs) can give gold loans. The loan-to-value (LTV) ratio is capped at 75% by the Reserve Bank of India (RBI). The LTV ratio was increased for banks to 90% till 31 March 2021.

So, LTV basically means that for a collateral worth 100, the bank or NBFC could only lend 75. So, as gold price falls, one may have to provide higher collateral, i.e., more gold for the same loan amount.

Gold of minimum 18 carat purity is considered for such loans and stones and other impurities are removed while valuing the gold.

Existing borrowers

If you have already availed of a gold loan, your lender may ask you to pay in advance in case the LTV exceeds the limit specified by the RBI.

“If a steep correction in gold price leads the LTV ratio of existing gold loans to exceed their regulatory caps, then the lender can ask their gold loan borrowers to pay the exceeded LTV component by either depositing the exceeded amount in cash or cheque or by pledging more gold as collateral with the lender," said Gaurav Aggarwal, director PaisaBazaar.com.

“If existing gold loan borrowers fail to deposit the difference in amount within a stipulated period, then the lender can sell the gold already pledged as collateral," he added.

If you have availed of a gold loan and the value of collateral has fallen due to a correction in prices, make good the difference in margin amount within the stipulated period.

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Published: 14 Apr 2021, 05:41 AM IST
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