Margin calls in gold loans: Avoid borrowing over 50-60% of pledged value

Maintain a liquidity buffer in case you get a margin call due to falling gold prices

Gold prices have fallen about 18.5 per cent from their peak, triggering margin calls on loans taken when prices were at or near those levels. More such calls may follow if the yellow metal declines further.

 

How margin calls get triggered

 

Margin calls are triggered when the loan-to-value (LTV) ratio breaches the permissible limit. “A loan sanctioned at 75 per cent LTV can breach the limit when a fall in gold prices reduces collateral value while the loan outstanding remains unchanged, pushing the effective LTV higher,” says Jyoti Prakash Gadia, managing director, Resurgent India. 

The lender then asks the borrower to either repay part of the loan or pledge additional gold. 

Consider this example. Gold worth ₹1 lakh is pledged to support a loan of ₹75,000. If the price of gold falls 18.5 per cent, the collateral value drops to ₹81,500. The effective LTV then rises to 92 per cent, triggering a margin call. 

Revised LTV slabs will take effect from April 1, 2026. “They will permit 85 per cent LTV for loans under ₹2.5 lakh, up to 80 per cent for loans up to ₹5 lakh, and 75 per cent for loans above ₹5 lakh,” says Maneesh Sharma, assistant vice-president — commodities and currencies, Anand Rathi Shares & Stock Brokers. The higher the LTV, the greater the risk of a margin call.

 

Time allowed after margin call

 

There is no single fixed regulatory timeline. “The time available varies by the lender’s internal policy, the extent of the LTV breach, and market volatility,” says Gadia.

 

“Lenders typically give between seven and 30 days for borrowers to restore the LTV,” says Manish Bansal, managing director, Surya Loan. This can be done either through partial repayment or by pledging additional gold.

 

Bansal says non-banking financial companies (NBFCs) often push for quicker action, while banks may allow slightly longer buffers. 

 

Time allowed before auction

 

Once the deadline for restoring the margin expires, lenders issue a pre-auction notice. If the borrower fails to respond to the margin call, lenders usually send a final notice and allow another seven to 14 days before auction proceedings begin. “The overall timeline from margin call to auction is typically around 10 to 21 days, though lenders may move faster during a sharp and sustained fall in gold prices,” says Gadia.

 

Alternative fund options

 

Borrowers facing margin calls may consider a personal loan if they have a strong credit score. A balance transfer to another lender offering better valuation is another way to avoid the auction.

 

“Borrowers can also consider loans against insurance policies, property, or other eligible assets for larger funding needs,” says Gadia. Liquidating financial assets, such as fixed deposits or mutual funds, or seeking short-term support from family and friends can help bridge the gap.

 

Borrowers can also use salary loans, loans against fixed deposits, top-ups on existing home loans, and pre-approved credit lines or overdrafts.

 

Bansal says speed matters more than cost initially, and borrowers can refinance into a cheaper option later.

 

Avoid loan at high LTV

 

With gold prices turning volatile, borrowers should be cautious about taking a gold loan at a high LTV ratio. “If the LTV ratio is high, even a small drop in gold prices will trigger margin calls and raise auction risk,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.

 

Borrowing conservatively can provide a cushion against any further decline in gold prices. “Borrowing at 50 per cent to 60 per cent of gold’s value is a prudent approach because it creates a buffer against price volatility and reduces the likelihood of forced top-ups,” says Adhil Shetty, chief executive officer, Bankbazaar.com.

 

Treat the higher permissible LTV of 80 per cent to 85 per cent as a ceiling, not a starting point.

 

“Higher LTV loans can also come with higher interest costs and become expensive over time,” says Shetty.

 

Colin Shah, managing director, Kama Jewelry, says borrowers should also take only as much as they need, and not up to the limit available.

 

What shorter-tenure loans mean

 

With gold prices becoming more volatile, lenders are planning shorter-tenure loans to manage lending risk more tightly. These loans could be offered at lower interest rates.

 

This has both advantages and drawbacks for borrowers. “Shorter-tenure loans can reduce interest burden and protect borrowers from long-term volatility in the price of gold,” says Shah.

 

However, shorter tenures can increase liquidity pressure and strain cash flows. Frequent rollovers may raise the effective cost of borrowing. They can also push up the equated monthly instalment (EMI).

 

Shah suggests choosing an EMI that the borrower can comfortably service. Align the loan tenure with your repayment capacity and do not opt for a shorter tenure merely to reduce the interest cost.

 

Avoid riskier repayment options

 

Bullet repayment schemes, under which principal and interest are paid at the end of the term, are riskier in a falling market. “Here, the debt keeps growing while the collateral value is shrinking,” says Kumar.

 

As a result, the LTV remains high throughout the loan tenure, leaving borrowers exposed to margin calls and auction if gold prices fall.

 

“Interest-only payments with bullet principal also carry similar risks and should be approached with caution,” says Shetty.

 

Regular monthly interest payments or EMIs are safer because they steadily reduce the principal during the loan tenure.

 

Do’s and don’ts

 

Choose a regulated lender. Before taking the loan, read the agreement carefully and understand the fine print on interest calculation, penalty charges, valuation method, margin calls, and the time allowed before auction.

 

Amid the ongoing volatility, keep an eye on the price of gold. Do not operate with the view that gold prices always rebound quickly. “It would also be prudent to maintain a liquidity buffer in case the lender asks for a top-up or partial repayment,” says Shetty.

 

Borrow only what you need, not the maximum you are eligible for. Do not treat gold loans as an easy source of short-term liquidity. Put a repayment strategy in place before borrowing.

 

“Avoid pledging emotional or heirloom jewellery that you cannot afford to lose in an auction,” says Kumar.

 

Money raised through this loan should not be used for speculation or for investing in assets with high price risk. Finally, do not choose an unnecessarily long tenure, as it will increase your interest cost. 

The writer is a Mumbai-based independent journalist