Banks Fear Future Shock as Gold Falls

Published: 30th July 2015 05:32 AM  |   Last Updated: 30th July 2015 06:32 AM   |  A+A-

HYDERABAD/KOCHI:Here is some good news! If forecasts are anything to go by, gold prices are set to touch Rs 20,500 per ten grams in the next six months. Globally, analysts predict the yellow metal to whipsaw around $900-$1,000 an ounce (one ounce equals 28 grams) by December-January. This is good news for prospective customers, but is proving to be a challenge for banks and NBFCs, which lend heavily against gold. Currently, 99.9 purity gold trades at Rs 25,035 per ten grams in Mumbai.

Lending credence to the price fall predictions is the expected interest rate hike by the US Federal Reserve later this year. “I think we are going to hit further milestone lows... Because we are receiving repeated comments of commitment from the US Fed that they will raise interest rates,” said Jameel Ahmad, Chief Market Analyst, ForexTime.  Gold price is denominated in dollars. When the dollar goes up, gold prices slump. In contrast, when the dollar comes under stress, gold price surges.

Lenders have already initiated precautionary measures. “We have intimated to customers to pay some amount towards the principal to defend the gold price fall. We are accepting insurance certificates, National Pension Scheme certificates and Kisan Vikas Patra to maintain our Loan-To-Value (LTV) as per stipulated levels,” said Babu K A, AGM-Retail Business, Federal Bank. Lenders fear a steep fall in gold price may prompt customers to default on loans. But, they seem prepared. “We are immune to the price fall as our LTV is 75 per cent for three months, 65 per cent for six months. The effective LTV for a year is only 60 per cent,” said VP Nandakumar, MD & CEO, Manappuram Finance.

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