A slump in gold prices to a five-year low has forced banks and gold loan lenders in the country to ask their customers to repay a part of loan amount immediately.
If yellow metal prices see further decline, the lenders will reduce their loan-to-value (LTV) ratio for gold loans. According to the Reserve Bank of India (RBI), the lenders are permitted to maintain the ratio at 75%.
"We fix the LTV at the beginning of every month and we keep a comfortable margin to avoid any volatility in prices. Therefore, we don't have to adjust the LTV immediately. But this morning, we sent notices to all our branches to get in touch with gold loan customers and ask them to make part-repayments of the principal amounts in required cases," Rakesh Sharma, managing director and chief executive, Lakshmi Vilas Bank, told Business Standard.
In the domestic market, gold prices fell on Tuesday to close ta Rs 25,400 per 10 grams.
"The long-term downtrend is still in place and more people are selling," Mark To, head of research at Hong Kong's Wing Fung Financial Group, told The Financial Express.
Whenever there is a steep fall in gold prices, the value of gold loan lent by the banks lessens and the customers are compelled to pre-pay a part of their loans taken against gold.
In case the customers fail to make the payment in the stipulated time, the lenders may opt to put the gold for auction.
Gold prices have been under pressure for the past few sessions amid growing expectations of interest rate hike by the US central bank in September. The US dollar continues to strengthen on such expectations, dragging the gold prices lower.
Further, the fall in gold prices is fuelled by subdued demand for the metal in China, the world's second largest consumer of gold. Investors in China have been shying away from gold for the past one year, as the country's stock markets have become more lucrative.
Federal Bank, a private sector lender, is also reported to have sent notices to its customers on Tuesday morning, asking them to pre-pay gold loan amount partially.
"Though the LTV wasn't changed, the recovery process had begun," said K A Babu, head (retail business), Federal Bank.
"We have been cautious on lending against gold because of the price fluctuation. Our LTV is such that the drop in prices is factored in. But in cases where the loan amount becomes more or is very close to the gold in our custody, we have started contacting customers to make payments," he said.
Non-banking financial companies (NBFCs) like Muthoot Fincorp and Manappuram Finance seem to be planning to recover a part of gold loan amount from their customers in the wake of slide in gold prices.
"The Association of Gold Loan Companies will take a call on whether to change the LTV ratio. As of now, it hasn't decided. Currently, it is 75 per cent of the average of the gold prices in the past 30 days. But to maintain healthy asset quality, we might take a call soon on whether to ask customers who have not paid their dues in six months or so to make part-payment of the gold loan or bring additional gold," said S Kannan, executive vice-president, Muthoot Fincorp.