Gold Loans Need Not be Discouraged

January 8, 2013 at 11:07


RBI’s working group, in its report, has given its opinion that lending against gold has not led to increase in gold prices and higher gold imports and indicated that it believes lending against gold by NBFCs and banks is important to the financial system, as these organizations channelize monetization of idle gold lying in the country and provide timely credit to low and middle class people who instead would have sought loans from pawnbrokers, says a study by Angel Broking.

In our view, these observations in the report would help in reducing the worries regarding the regulatory overhang on gold loan NBFCs, which was the primary reason for the relative underperformance of listed gold loan companies, adds the research.

LTV to be raised to 75% from 60% currently, but calculated explicitly on the ‘value of metal’: The working group recommends raising of loan- to value (LTV) for gold loan NBFCs, as they believe a) constricted LTV has/would lead to borrowers shifting again to pawnbrokers and b) there is minimal threat to financial stability of these companies, considering remote possibilities of steep correction in gold price and current low NPA levels in this business, added the report.