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With the Covid-19 pandemic forcing many to avail of gold loan, there have been rising defaults as many are facing continued stress on their finances.
The mayhem unleashed by the Covid-19 pandemic through two waves since April 2020 resulted in huge job and income losses leading to huge financial strain to many families. This led to many to approach lenders for loan by pledging their gold holdings as collateral. Gold loan is a quick solution to raise emergency funds for low-income families and small businesses.
While lenders witnessed a surge in gold loan offtake during the pandemic, the trend has led to rising defaults in repayments by the borrowers. According to reports, the rising defaults have also forced some lenders to auction the pledged gold to recover their dues.
“The last year has been difficult for most people, especially for those who took gold loans to finance their business operations or manage additional expenses due to the pandemic. The second wave of the pandemic has set back their recovery even further. Together, this has made it difficult for people to pay back the loans,” Adhil Shetty, CEO, Bankbazaar.com said.
Loan-to Value (LTV) factor
The RBI’s in August 2020 raised the LTV to 90 per cent for banks on gold loans from the earlier 75 per cent in the wake of the pandemic. “With higher LTV, lenders went aggressive on gold loans. Things started turning awry when gold prices started falling from its peak in 2020. This was not a favourable situation for lenders and they asked borrowers to either pledge more gold or pay the margin difference amount. But, given that businesses are yet to come back on track, salaries are not restored yet, many borrowers started defaulting,” V Swaminathan, CEO, Andromeda and Apnapaisa said.
Impact of falling gold prices
Lenders generally lend up to 75 percent of the gold value. The LTV upper threshold starts getting breached when gold prices fall. “Ideally when gold prices start falling borrowers are required to either pledge more gold or pay the marginal difference amount to the lenders to keep the LTV ratio at appropriate level,” Swaminathan said.
In a falling gold prices environment, the lender may ask for a one-time partial pre-payment to bring down the LTV. This helps improve the situation and you can service the rest of the loan over a period of time.
Default hurts your credit score
When you default on a gold loan, it is communicated to the credit information bureaus. Your credit score gets hurt and you may find it difficult to borrow in future. “Like with any other loan, gold loans come with consequences if you default on the repayment. It will also have a negative impact on your credit history and score,” Shetty said.
Negotiate with lender
The lenders may send you a reminder for EMI payment if there is a default. When you are unable to meet the repayment commitments, get in touch with your lender to rework the terms. “You can negotiate with the lender and explore different options, including extending your tenor or changing the repayment pattern. Some lenders may allow you to refinance your loan at a lower interest once you clear all accrued interest if it is an old loan. If none of these options work, you can work with the lender on auctioning the gold and closing the loan,” Shetty said.
Factors to keep in mind
When you think of availing a gold loan, always keep in mind the possibility of the price of the yellow metal falling and also assess your future repayment capability. “Gold loans are a convenient and faster option to avail credit, but opt for them only when you are facing a temporary cash-flow problem. Avoid borrowing against gold for discretionary expenses, like buying or upgrading a car, holiday expenses and so on. Also, try to keep the tenure as short as possible,” Swaminathan advises.