Banks may raise margin requirement for gold loans

Banks have started reviewing the margin after a sharp fall in gold prices

Following a sharp fall in gold prices over the past few days, banks have started reviewing the margin requirement for loans against the yellow metal.

After dropping Rs 3,160 over the last three sessions, gold prices on Wednesday fell Rs 90 to Rs 26,350 per 10g, the lowest level since August 17, 2011, on sustained selling by stockists against restricted buying.

Typically, most public sector banks maintain a loan-to-value ratio of 70 per cent, while it is higher for some private-sector lenders. Top executives of government banks said they had already reduced the amount they used to lend per gram of pure gold.

“The amount of loan is dependent on how much pure gold is available with the borrower. Earlier, for 1 g, we used to lend Rs 2,300. We have reduced it to Rs 1,700. We will also review the loan-to-value (LTV) ratio,” a senior banker said.

State Bank of India Chairman Pratip Chaudhuri had yesterday said his bank would raise the margin requirement. “Generally, we keep a 30 per cent limit (of value). Yes, we will have to review that. That (LTV) will be adjusted. We would be revising our advisory for gold loans with the valuations (dropping),” he had said, adding gold prices had dropped but were still above 70 per cent of the peak value.

SBI, which has Rs 35,000-crore of gold loans on its books, however, said there was no immediate impact.

The finance ministry has also swung into action. In an interview with Bloomberg, Financial Services Secretary Rajiv Takru said banks would review loans backed by gold and call for more collateral as the price of the metal fell.

When gold prices started falling, the central bank immediately called on banks to review lending, Takru said.