Volatility raises stress on gold loan books of banks

Volatility in gold prices has bankers worried. The rise or fall in prices has complicated the loan-to-value (LTV) ratio calculations and bankers aren’t ruling out slippages in gold loan portfolios in case of a sharp correction in prices. “Given gold prices have been volatile in the last few months, we are seeing some early signs of credit slippage. We want to be cautious on our gold loan portfolio in the current environment,” the retail banking head of a large private sector bank said on condition of anonymity. Analysts estimate the gold loan LTV ratio for banksstands at about 70 per cent. This means if a borrower pledges gold jewellery worth Rs 100, banks would offer him a loan of up to Rs 70. If the price of gold falls sharply, the value of the pledged jewellery also decreases and, consequently, banks’ credit risks rise.

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