InvestorQ : Are there any specific risks involved in gold loans for banks in India?
Katherine Gonsalves made post

Are there any specific risks involved in gold loans for banks in India?

Answer
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Rutuja Nigam answered.
3 months ago


There are two risks in the gold loans business; the risk of tighter regulation and the risk of gold prices falling. Let us look at the risk of regulation. As of now, gold loans are still a small part of the loan portfolio. But, RBI will not hesitate to tighten regulations if the business picks for such activities. This kind of tightening has been there in seen in most industries with banking being one of the key such areas. Secondly, there is the aspect of gold prices correcting sharply. Currently, the LTV ratio of 75% on gold is possible only because gold prices have been stable. But there have been long spells of correction too in gold. Between 1980 and 1999, gold moved from $950/oz to $240/oz. Similarly, between 2011 and 2015, gold fell from $1850/oz to $1050/oz. These kinds of price movement can change the economics of the gold loan business drastically. Banks need to be wary of the price risk that is implicit in the gold loan business!