Amid COVID bloodbath, gold is the lifeline for most

Lenders, unable to recover pledged gold, are increasingly resorting to auction; as they wait for customers hit hard by pandemic to return with ‘loan against gold’

Gold loan
Lenders have started pressuring borrowers to bring more gold or repay some of the loan immediately.

Amid the second deadly COVID wave has come financial distress and a growing inability of the people to meet banks’ collateral demands. This is forcing Indian households to give up pledged gold jewelry. Many lenders are now planning to auction the pledged jewellery.

Rating agency Crisil pointed out on April 12 that since June 2020, loans against gold surged even as lending to other segments was affected by asset quality concerns. In the 11 months through February 2021, loans against gold grew about 70% for banks to cross ₹56,000 crore, it said.

When the pandemic struck last year, the RBI allowed banks to lend up to 90% of the value of the pledged gold till March 31, 2021, up from 75% earlier. Gold prices have fallen from a peak of 57,000 per 10 grams in August last year to around 45,500 as of end-March before recovering to around Rs 49,000 per 10 gm now.

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After gold prices started falling this year, and the Loan-to-Value (LTV) reverted to 75%, lenders have started pressuring borrowers to bring more gold or repay some of the loan immediately. However, with incomes lost and medical expenses rising, many have had to let go of the gold, triggering the auctions.

Gold loan customers are usually from the lower end of the middle class whose incomes have been affected by lockdowns and loss of wages. Bloomberg Quint reported on May 5 that newspaper advertisements on gold loan auctions have become frequent in the past few weeks.

Fluctuations in gold prices and the second wave do not bode well for asset quality, industry sources say. Bankers believe that since the current restrictions are still not as strict as last year’s national lockdown, the impact on people’s incomes will be limited. Yet, retail distress has started surfacing in the form of auto-debit repayment failures, which started rising in April, sources said.

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Industry experts say once things open up again, and if an individual or a small business needs money, they will go back to the gold loan. The extent of the demand will depend on how the COVID wave affects customers.