Gold price fall triggers margin calls on bullet loans

Kolkata: A sharp fall in gold prices over the past five months has triggered margin calls on some gold loans, particularly bullet repayment loans, while loans with regular monthly repayments have remained largely insulated, people aware of the matter said.Local gold prices have corrected about 22% from their peak in the last week of January.

The metal fell about 15% in March amid the West Asia conflict before remaining range-bound for some time.

Prices came under renewed pressure after the US Federal Reserve signalled that policy rates could remain higher for longer.The price of 24-carat gold in India is currently around ₹1.40 lakh per 10 grams, compared with its peak of ₹1.82 lakh on January 29.

A margin call arises when lenders ask borrowers to either repay part of the loan or pledge additional collateral.

In gold loans, a fall in gold prices reduces the value of the pledged gold and pushes up the loan-to-value (LTV) ratio if the outstanding loan remains unchanged, prompting lenders to seek additional margin.

132060592The stress has been visible in bullet repayment loans, where borrowers do not make monthly instalments but repay the principal and accumulated interest in a lump sum at the end of the tenure.

Since the outstanding principal does not decline during the loan period, these loans are more vulnerable to a fall in collateral value.Until March, most short-tenure gold loans offered by non-bank lenders carried a bullet repayment or anytime repayment option without prepayment charges, said the chief executive of a large gold loan company.

From April 1, the Reserve Bank of India capped the LTV ratio at 85% for gold loans below ₹2.5 lakh, 80% for loans between ₹2.5 lakh and ₹5 lakh, and 75% for loans above ₹5 lakh.

Most lenders ET spoke to, however, said they maintain average LTVs well below the regulatory ceiling to provide an additional cushion.With the new gold loan framework taking effect from April 1, non-bank lenders have begun shifting towards EMI-based products."Regular EMI payments steadily reduce the outstanding principal of a gold loan, effectively lowering its loan-to-value ratio," said Sachin Seth, regional managing director, CRIF India & South Asia.

"Within a few months, this creates a protective equity cushion, shielding the loan from margin calls triggered by minor market corrections in gold prices."Lenders said the risks remain manageable despite the correction in gold prices.

"We have no such risk at this point of time, even if prices come down further, as we manage the LTV constantly.

These being shorter-term loans, we can keep managing this during renewals or fresh bookings," said managing director of a private bank.

"Unless there is a 10% fall in a single day, there is not much to worry about.

When prices come down gradually, the situation can be managed," the person added. ...